1.economics.docx

ECONOMICS • Definition of Economics: • Greek word- “oikonomia”/ ”oikonomos” - means management of a household • It is the careful or thrifty use of resources, as of income, materials, or labor. • It is the management of the resources of a country, community, or business. • Economics is a social science that deals with the efficient allocation of scarce resources to satisfy man’s unlimited wants and needs.  Economics is a field of study that has become increasingly relevant in our globalized, financialized society. The economy is part of our collective conscious and a buzzword that links personal finances to big business and international trade deals. Economics deals with individual choice, but also with money and borrowing, production and consumption, trade and markets, employment and occupations, asset pricing, taxes and much more. What then is the definition of economics? One way to think of it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants given a world with scarce resources. In other words, economics tries to explain how and why we get the stuff we want or need to live. How much of it do we get? Who gets to have more? Who makes all this stuff? How is it made? These are the questions and decisions that economics concerns itself with. As an individual, for example, you constantly face the problem of having limited resources with which to fulfill your wants and needs. As a result, you must make certain choices with your money – what to spend it on, what not to spend it on, and how much to save for the future. You'll probably spend part of your paycheck on relative necessities such as rent, electricity, clothing and food. Then you might use the rest to go to the movies, dine out or buy a smartphone. Economists are interested in the choices you make, and investigate why, for instance, you might choose to spend your money on a new Xbox instead of replacing your old pair of shoes. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how individuals, companies, and nations as a whole behave in response to certain material constraints. Adam Smith (1723 - 1790), is often considered the "father of modern economics." His book "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776) was the first fully elaborated attempt to understand why some nations prospered while others suffered widespread poverty. He famously argued that individuals working for their own self-interest could nonetheless create a stable and wellprovisioned society through a mechanism he called the invisible hand of the market. Smith, however, was not the first to write on economic matters. Other scholars of what was then known as political economy wrote prior to "The Wealth of Nations," but Adam Smith was one of the first to identify the unique economic changes that accompanied the birth of industrialization and capitalist production. Smith’s work was followed by David Ricardo’s "Principles of Political Economy and Taxation" (1817) and later by Karl Marx in "Capital" (1867). Each of these authors sought to explain how capitalism worked and what it meant for producers and workers in the capitalist system. (See also: What is the difference between Communism and Socialism?) In the late 19th century, the discipline of economics became its own distinct field of study. Alfred Marshall, author of "The Principles Of Economics" (1890) defined economics as a social science that examines people's behavior according to their individual self-interests. He wrote, "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man." In the early 20th century, however, there was a push toward legitimizing economics as a rigorous science alongside the physical sciences like chemistry and physics. As a result, mathematical models and statistical methods were brought to the forefront along with a number of strong assumptions that are needed to make those models work. For example, modern mainstream economics makes the assumption that human beings will always aim to fulfill their individual self-interests. It also assumes that individuals are rational actors in their efforts to fulfill their unlimited wants and needs. It also makes the claims that firms exist to maximize profit and that markets are efficient. This school of economics, which has come

to dominate both the academic field of economics as well as the practical application of economic theory in policy and business, is known as neoclassical economics. Global Setting: A. Rich Countries (Northern Hemisphere) (i.e.: U.S., Japan, Germany, France, Canada, U.K., Italy, etc.) B. Poor Countries (Southern Hemisphere) (i.e.: Africa, Asia, Latin America [South & Central Americas) Divisions of Economics: A. Microeconomics. Deals with the economic behavior of individual units such as the consumers, business firms & the owners of the factors of production ( land, labor, capital & entrepreneurship) Concerns: 1. Price of a particular product 2. Number of workers of a corporation 3. Income of an employee 4. Income & expenditures of a business B. Macroeconomics. Deals with the economic behavior of the whole economy or its aggregate or totality as represented by the government, the business sector, and the households Concerns: GNP, GDP, National Income, General Level of Prices/Inflation, Total Expenditures, and Level of Employment Development of economic ideas and theories Economic ideas and theories are generally the products of existing conditions. Differences in the time and place usually have different situations, and therefore ideas and theories are not the same. Ideas and theories may be intended to change or improve existing conditions. 1. Ancient Economic Ideas 2. Medieval Economic Ideas 3. Classical Theories 1. Ancient Economic Ideas A. Plato(Greek Philosopher) - To him, Agriculture is very important, and he was in favor of specialization in production. B. Aristotle - He stressed the value of management of agriculture. He was not in favour of too much wealth. He did not like usury and trade. However, he disagreed with Plato about communal wealth. - He claimed that this is not feasible and that it destroys individual incentives. C. Xenophon - In favour of capitalism. He proposed that the government should promote trade and shipping. - He also encourages the formation of more silver companies to increase general wealth. Moreover he was in favour of joint-stock companies, specialization and division of labor. - Agriculture as the basis of wealth  Xenophon, an Athenian writer from the fourth century, noted that Athens could always be assured of traders bringing their goods into Athens, because traders knew they could always get a valuable trade commodity, namely silver in the form of Athenian coinage, in exchange. To ensure the demand for its silver, Athens took great care to maintain the reputation of its coinage for high quality and to associate that reputation with a familiar

design that went unchanged for several centuries. Such a policy attests to a state interest in production and exports, at least in this sector of the economy.  Athens was also motivated to encourage trade to obtain revenue from taxes. Both transient and resident foreigner traders had to pay poll taxes in Athens that citizens did not. Athens also had various port, transit, and market taxes that would benefit by increased trade, including a two percent tax on all imports and exports. 2. Medieval Economic Thought  Feudalism reaches its peak in Europe and agriculture of livelihood. -But the rebirth of trade and commerce, the merchants class became powerful and the feudal lords lost their influences. Ideas of cooperation were developed among the merchants to protect their own interest and to attain their common objectives.  Church as the most important institution. o Active participant not only on religious affairs but also in political and economic activities. A. St. Thomas Aquinas a. “Distributive Justice

-fair distribution of goods among the members of society. -wage and price

b. Compensatory Justice

The Economic Doctrines of Mercantilism  an economic theory developed in the 16th to 18th centuries holding that

a government should control the economy and that a nation should increase its wealth by selling more than it buys from other nations Precious metals, such as gold and silver, were deemed indispensable to a nation’s wealth o “Gold and Silver” – Basis of wealth of a country B. Thomas Mun “Favorable foreign trade” - Exports and Imports of good and services. - Foreign trade is favorable if exports are greater than imports. o

Laissez Faire Theory Government should not intervene in economics affairs. Individuals should be free to pursue their own particular economic interest. They should be free to choose their own economic enterprise or occupation and the government should not help or hinder them. 3. Classical Theories A. Adam Smith – “Father of modern Economics” - Free market competition. - An Inquiry into the Nature and Causes of the Wealth of Nations" B. David Ricardo -The Theory of Comparative Advantage - Nation should export the goods which they enjoy the greatest advantage, and should import the goods which they have the greatest disadvantage. - Agricultural countries export raw materials and import the finished product. C. Karl Marx  Labor must be socially necessary. -He maintained that the workers are the real producers of goods. And, yet, he claimed the benefits of production go to the capitalist and not to the workers. -

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 Primitive Society- Social equilibrium. -However, when new ideas and new tools of doing things were introduced, the old system was disturbed. Considering that Man was greatly concerned with material things. This led to a class struggle between the workers and the capitalists. -In the class struggle, Marx predicted the downfall of capitalism due to its limitations. However, such prediction did not come true. John Meynard Keynes a. Keynesian Theory of Employment o -Employment determines the necessity of squatting the aggregate supply of goods with the aggregate demand of goods. -he assumed that the factors of production, such as capital goods, supply of labor, technology, and efficiency of labor, remain unchanged while determining the level of employment. Therefore, according to Keynes, level of employment is dependent on national income and output. Keynes propounded that the level of employment in the short run is dependent on the aggregate effective demand of products and services. An increase in the aggregate effective demand would increase the level of employment and viceversa. Total employment of a country can be determined with the help of total demand of the country. A decline in total effective demand would lead to unemployment Effective demand = National Income = National Output

E. Joseph Schumpeter Innovation Theory - According to him, the key factor in economic development is the innovator or the entrepreneur. He is the planner, organizer, coordinator, and implementor of economic activities. F. Jean Sismondi -A noted Italian writer, stated that wealth should not be measured in terms of material things but in terms of human welfare. -He rejected Laissez faire and asserted that the state should interfere to prevent the unfair distribution of wealth spawned by unrestrained capitalism. -He proposed an active role for the government in protecting human values. Schools of thought 1. Classical School  The Classical school, which is regarded as the first school of economic thought, is associated with the 18th Century Scottish economist Adam Smith, and those British economists that followed, such as Robert Malthus and David Ricardo.  The main idea of the Classical school was that markets work best when they are left alone, and that there is nothing but the smallest role for government. The approach is firmly one of laissez-faire and a strong belief in the efficiency of free markets to generate economic development. Markets should be left to work because the price mechanism acts as a powerful 'invisible hand' to allocate resources to where they are best employed.  In terms of explaining value, the focus of classical thinking was that it was determined mainly by scarcity and costs of production.  In terms of the macro-economy, the Classical economists assumed that the economy would always return to the full-employment level of real output through an automatic selfadjustment mechanism.  It is widely recognised that the Classical period lasted until 1870.

2. Neo-classical  The neo-classical school of economic thought is a wide ranging school of ideas from which modern economic theory evolved. The method is clearly scientific, with assumptions, and hypothesis and attempts to derive general rules or principles about the behaviour of firms and consumers. o For example, neo-classical economics assumes that economic agents are rational in their behaviour, and that consumers look to maximise utility and firms look to maximise profits. The contrasting objectives of maximising utility and profits forms the basis of demand and supply theory. Another important contribution of neo-classical economics was a focus on marginal values, such as marginal cost and marginal utility. 3. New classical New classical macro-economics dates from the 1970s, and is an attempt to explain macroeconomic problems and issues using micro-economic concepts like rational behaviour, and rational expectations. New classical economics is associated with the work of Chicago economist, Robert Lucas. 4. Keynesian economics  Keynesian economists broadly follow the main macro-economic ideas of British economist John Maynard Keynes. Keynes is widely regarded as the most important economist of the 20th Century, despite falling out of favour during the 1970s and 1980s following the rise of new classical economics.  In essence, Keynesian economists are skeptical that, if left alone, free markets will inevitably move towards a full employment equilibrium.  The Keynesian approach is interventionist, coming from a belief that the self interest which governs micro-economic behaviour does not always lead to long run macro-economic development or short run macro-economic stability. Keynesian economics is essentially a theory of aggregate demand, and how best to manipulate it through macro-economic policy. Economic systems 1. Command Economic System  A command economic system is characterized by a dominant centralized power (usually the government) that controls a large part of all economic activity. This type of economy is most commonly found in communist countries. It is sometimes also referred to as a planned economic system, because most production decisions are made by the government (i.e. planned) and there is no free market at play.  Economies that have access to large amounts of valuable resources are especially prone to establish a command economic system. In those cases the government steps in to regulate the resources and most processes surrounding them. In practice, the centralized control aspect usually only covers the most valuable resources within the economy (e.g. oil, gold). Other parts, such as agriculture are often left to be regulated by the general population.  A command economic system can work well in theory, as long as the government uses its power in the best interest of society. However, this is unfortunately not always the case. In addition to that, command economies are less flexible than the other systems and react slower to changes, because of their centralized nature. 2. Market Economic System  A market economic system relies on free markets and does not allow any kind of government involvement in the economy. In this system, the government does not control any resources or other relevant economic segments. Instead, the entire system is regulated by the people and the law of supply and demand.

 The market economic system is a theoretical concept. That means, there is no real example of a pure market economy in the real world. The reason for this is that all economies we know of show characteristics of at least some kind of government interference. For example, many governments pass laws to regulate monopolies or to ensure fair trade and so on.  In theory, a market economic system enables an economy to experience a high amount of growth. Arguably the highest among all four economic systems. In addition to that, it also ensures that the economy and the government remain separate. At the same time however, a market economy allows private actors to become extremely powerful, especially those who own valuable resources. Thus, the distribution of wealth and other positive aspects of the high economic output may not always be beneficial for society as a whole. 3.

Mixed Economic System  A mixed economic system refers to any kind of mixture of a market and a command economic system. It is sometimes also referred to as a dual economy. Although there is no clear-cut definition of a mixed economic system, in most cases the term is used to describe market economies with a strong regulatory oversight and government control in specific areas (e.g. public goods and services).  Most western economies nowadays are considered mixed economies. Most industries in those systems are privately owned whereas a small number of public utilities and services remain in government control. Thus, neither the private nor the government sector alone can maintain the economy, both play a critical part in the success of the system.  Mixed economies are widely considered an economic ideal nowadays. In theory, they are supposed combine the advantages of both command and market economic systems. In practice however, it’s not always that easy. The extent of government control varies greatly and some governments tend to increase their power more than necessary.  In a Nutshell o There are four types of economic systems; traditional, command, market and mixed economies. A traditional economic system focuses exclusively on goods and services that are directly related to its beliefs and traditions. A command economic system is characterized by a dominant centralized power. A market economic system relies on free markets and does not allow any kind of government involvement. Finally, a mixed economic system is any kind of mixture of a market and a command economic system.