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Marshall, Alfred(1842–1924) an English economist who depicted precise mathematical relationships between economic variables in his textbook Principles of Economics (1890). Using calculus, Marshall was able to show how value is partly determined by the MARGINAL UTILITY of a good and how the intensity of wants decreases with each unit acquired. Thus, Marshall was able to explain the PARADOX OF VALUE, showing how luxuries like diamonds have a higher price than essentials like water because consumers have few diamonds while water is generally plentiful. This analysis enabled Marshall to explain downward-sloping DEMAND CURVES and CONSUMER SURPLUS (the surplus satisfaction derived by a consumer whenever he can buy a good at a lower price than that which he would be prepared to pay rather than go without the good). Marshall also developed the concept of ELASTICITY OF DEMAND.
Marshall argued that the forces of both demand and supply determine value, with demand determining price and output in the short run and changes in resource inputs and production costs influencing price in the long run. He suggested that supply prices would depend upon production costs and in analysing short-run production cost showed how the marginal product of all resources tends to diminish as variable factor inputs are combined with fixed amounts of other resources (DIMINISHING RETURNS to the variable factor input). In the long run, Marshall suggested that industries would experience reducing costs and prices because of ECONOMIES OF SCALE resulting from greater specialization. See REPRESENTATIVE FIRM.