Ch 2 - Evolution of Economic Thinking

  • Neoclassical thinking: a broad theory that focuses on supply and demand as driving forces behind the production, pricing, and consumption of goods and services
      * neoclassical school of economics started in 1870

  • Difference between:
      * Classical thinking theory: states that the value of a product is determined by the cost of production
      * Neoclassical economic theory:  states that the value of a product or service is determined by how the consumer perceives said product
      * Monetarism: a school of thought in monetary economics that emphasises the role of government in controlling the amount of money in circulation
      * Variation in the money supply has a major influence on national output in the short run and price levels on the long term
      * Creator of the theory of monetarism, Milton Friedman in 1967
      * Main concern: inflation, as there will be too much growth in the money supply

  • Advantages:
      * Government does not control the economy
      * Short time log
      * Can use taxation

  • Disadvantages:
      * may be politically motivated
      * tax incentives may be spent on imports
      * can create budget defiencty

  • Behavioural Economics: Neo-classical approach that consumers behave rationally

  
  1. This theory believes that customers think in a logical and intelligent way to make decisions
  2. Branch of economics which mainly focuses on the psychology behind decisions making of consumers and how it affects the economy

  • Nudge Theory: theory that consumers can be ‘nudged’ to make decisions voluntarily that are better for them and for society.
      * advantages: improves people’s standard of living, health, communities, environment
      * disadvantages: government intervention takes away human rights, government doesn’t always know what is the best of customers

  • Classical economics: an idea that markets work best when they’re left alone and that government plays a very small rate

  → Alfred Marshall: the exchange of goods and services as the key factors of economic analysis

  → Karl Marx: founder of communism, believed that there will be an inevitable breakdown in the capitalist free trade system

  • Neoclassical: focuses on how individuals operate within an economy

  • Keynesian Theories:

  
  1. In order to increase demand, more money should be spent and taxes should be lowered
  2. Demand, and not supply, determined the total national income of a country
  3. People must run budget deficit and spend more money than they have

  • Keynesian Economics:

  
  1. Government spending on infrastructure and unemployment benefits and education will increase consumer demand
  2. Government spending is necessary to maintain employment

  • Classical Economics:

  
  1. increasing business growth
  2. promoting free trade boosts the economy
  3. government should play a limited role, not customers