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