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

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  • 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

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

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

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  • 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

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  • 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

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  • 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

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  • Keynesian Economics:

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

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  • Classical Economics:

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

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