Marshall's achievement was to refine and develop microeconomic theory to such a degree that much he wrote is still familiar to readers of the elementary economic textbooks today. His theory of value brought together the diverse elements of previous theories.
In 1885, he returned to Cambridge as Professor of Political Economy, a post he retained until his retirement in 1908. His most important works include The Pure Theory of Foreign Trade (1879), The Principles of Economics (1890), Industry and Trade (1919) and Money, Credit and Commerce (1923). Marshall was in the long tradition of the English Classical School, which was founded by Adam Smith and David Ricardo, and his influence on succeeding generations of economists has been very great.
His achievement was to refine and develop microeconomic theory to such a degree that much he wrote is still familiar to readers of the elementary economic textbooks today. His theory of value brought together the diverse elements of previous theories. On the one hand, he showed how the demand for a commodity is dependent on a consumer’s utility or welfare. The more of a commodity a consumer has, extra utility or benefit accrues to him from an additional purchase. He will not go on buying a commodity until this extra benefit falls to zero. Rather, he will stop buying extra when be finds that the money he has to pay for it is worth more to him than gain from having extra unit of the commodity.At this point of equilibrium a fall in the price, therefore, will mean that it becomes worthwhile to him to exchange his money for more of the commodity.
In general, therefore, a fall in price will increase the quantity of the commodity demanded, and in theory, a schedule could be drawn up which shows how much would demanded at each price. The resultant graph would show a downward sloping demand curve. Marshall invented the expression elasticity to describe his measure of the response of demand to small changes in price. Similarly, on the supply side, higher prices are necessary to bring forward increased outputs and a supply schedule with its corresponding supply curve can be drawn. The price of the commodity is determined at the point where the two curves intersect. These worked like a pair of scissors, neither blade of which cuts without the presence of the other.
Marshall recognized that his consumer utility theory was in some ways an over simplification. It does not take account of complementary or competitive goods, and assumes that the marginal utility of money is constant. However, he argued that his analysis applied to small price changes and to goods upon which only an insignificant proportion of income was spent. It was within this framework that Marshall discussed the idea of consumer surplus. For a given quantity of a commodity purchased on a competitive market, the price will be the same for each unit of the commodity sold. However, for any individual purchaser the price is equal to the utility to him of the last unit of the total quantity purchased; the last but one being worth more, the last but two worth more again; and so on. These utilities can be added up and the extra, over the price and quantity paid out, is the consumer’s surplus. He was aware of the shortcoming of the ‘Stationary State’ of the typical classical analysis and emphasized the importance of the production period.
He considered (a) a market period in which supplies are all fixed, (b) a short period in which supplies can be increased, but only to the extent possible by better use of current capacity, and (c) a long period in which capacity can be increased. The classical economists had shown how landowners receive rent, as a surplus. As land was a factor of production in fixed supply, it differed from other factors of production,as its returns were not related to work done. Marshall extended the concept by pointing out that, in the short-run, man-made capital was in fixed supply also, and during the period, which it took to manufacture, it earned a quasi-rent.