Economics 3

Learning objectives 

• Must understand and be able to critically analyse the key features of these schools of thoughts; 

• Classical Economics 

Neoclassical Economics 

• Austrian Economics 

• New Institutional Economics 

We will only cover these because they are most relevant for Eco 101 given limited time. Why Study economic schools of thought? 

• A school of economic thought is a group of economic thinkers who share a common perspective on the way economies work. 

➢Why Study economic schools of thought?

 ❖Offers diverse perspectives on economic issues. 

• Exploring economic schools of thought unveils diverse perspectives on the functioning of economies. 

❖Encourages critical analysis and thinking skills. 

• Engaging with various theories fosters critical thinking and analytical skills essential for economic analysis 

❖Provides historical context for economic theories. 

• Understanding the historical context surrounding economic theories enhances comprehension of their development and evolution. 

❖Informs policy decisions with varied viewpoints. 

• Different economic theories offer distinct policy prescriptions, enriching the debate on effective policymaking. Classical economics 

• Classical economics was formed in the late 18th and early 19th centuries and was characterized by the work of economists such as Adam Smith and David Ricardo. 

• The main idea of the Classical school was that markets work best when they are left alone (laissez-faire), and that there is nothing but the smallest role for government.

 ➢Markets should be left to work because the price mechanism (supply and demand) acts as a powerful ‘invisible hand’ to allocate resources to where they are best employed. Classical Economist: Adam Smith 

• Adam Smith was an 18th-century Scottish economist and known for his most famous book on the "The Wealth of Nations," published in 1776 in the field of economics. 

• In this book, Smith argued that the division of labour, free trade, and competition were key drivers of economic growth and prosperity. 

• The classical economists emphasized the importance of the division of labour and the efficiency of free markets in allocating resources and determining prices. 

• He believed that individuals acting in their own self-interest would be led by an "invisible hand" to promote the greater good of society as a whole. 

• Smith also advocated for limited government intervention in the economy and believed that markets should be free from undue regulation and interference. 

• His ideas continue to be influential in economics, particularly in the areas of free trade and laissez faire capitalism. Classical Economics

 • According to Smith, the country that has the highest GDP today (i.e. USA ) is not the country with the highest gold reserve but is the country that can produce the most valued goods and services. 

• Smith's key thought was that worker productivity is the key to increasing wealth, which could be increased by division and specialization of labour. • He came up with the labour theory of value, which states that the cost of production equals the value of the product produced. 

• So, the value of goods and services is determined mainly by scarcity and costs of production. Classical Economist: David Ricardo 

▪ David Ricardo was an 18th and 19th-century British economist who made significant contributions to the field of economics, particularly in the area of international trade. 

▪ His most famous work, "Principles of Political Economy and Taxation," published in 1817, introduced the concept of comparative advantage. 

▪ Ricardo argued that countries could benefit from specializing in the production of goods in which they had a comparative advantage (i.e., the ability to produce a good at a lower opportunity cost than other countries), even if they were not absolutely efficient. 

▪ Absolute advantage is a concept in economics that refers to the ability of a country, firm, or individual to produce a particular good or service more efficiently than another entity. In other words, it's the ability to produce more output with the same amount of inputs or the same output with fewer inputs.

 ▪ He also believed in the labour theory of value, which held that the value of a good was determined by the amount of labour required to produce it. 

▪ Ricardo's ideas were influential in the development of classical economics, and he is widely regarded as one of the most important economists of his time. 

Neoclassical economics • Neoclassical economics is an economic theory that emerged in the 1900s that differs from classical economics in the case of setting the value of a product. • Was characterized by the work of economists such as William Stanley Jevons, Leon Walras, and Alfred Marshall. 

• Classical economists believed that the value of a good should be derived from the cost of production. But Neoclassical economists argued that the value of a good should be set based on the utility that is derived by the consumers. 

• Another important contribution of neo-classical economics was a focus on marginal values, such as marginal cost and marginal utility. 

• The idea was that individuals make decisions at the margin, or by comparing the marginal benefits and costs of different actions. Neoclassical Economist: Alfred Marshall

 • Alfred Marshall was a 19th and early 20th-century British economist who is widely regarded as one of the founders of neoclassical economics. 

• His most famous work, "Principles of Economics," published in 1890, was a seminal text in the field and helped to establish economics as a rigorous academic discipline.

 • Marshall contributed on the concept of marginal utility, which holds that the value of a good or service is determined by the satisfaction or utility derived from its marginal (or additional) use. 

• He also introduced the idea of price elasticity of demand, which measures the responsiveness of demand to changes in price. 

• Marshall's work was instrumental in the development of microeconomics and helped to establish the modern framework for analyzing consumer behaviour and market equilibrium. Neoclassical Economist :Leon Walras • Leon Walras was a 19th-century French economist who is widely regarded as one of the founders of neoclassical economics. • He is best known for his general equilibrium theory, which describes how prices are determined in a market economy.