Economic Theories

Classical Economics

  • created through Adam Smith’s The Wealth of Nations

  • the invisible hand: the unseen forces that move the free market economy

  • prices, wages and markets naturally adjust themselves

  • equilibrium: a state in which the supply and demand for a given good or service are in balance.

  • free market: an economic system based on supply and demand with little or no government control

  • Laissez Faire: an economic philosophy, developed in the 18th century, that opposes any government intervention in business affairs

Marxian Economics

  • labour theory of value: the idea that a products true value comes from the human labour put into making it. Value determined by the average number of labour hours necessary to produce it.

  • exploitation in capitalism:

    • for Marx, capitalism is inherently exploitative. There is a conflict of interest because workers produce the wealth, but receive in wages only a fraction of the wealth they produce. This is exploitation.

    • The value that workers produce over and above what they receive in wages is known as surplus value

  • historic materialism: the notion that economic systems naturally evolve through stages

  • Marx believed as Feudalism gave way to capitalism, capitalism would collapse leading to Socialism and later communism.

Game Theory

  • a theoretical framework for conceiving social situations among competing players.

  • questions how people behave when their success depends on others choices

  • prisoners dilemma: a paradox in decision analysis in which two individuals acting in their own self-interests do not produce the optimal outcome

  • Nash equilibrium: a scenario in game theory in which no player in a non-cooperative game has anything to gain by changing only their strategy.

Neo-classical economics

  • a broad theory that focuses on supply and demand as the driving forces behind the production, pricing and consumption of goods and services.

  • stopped looking at the economy through the lens of social classes and instead focus on how individuals make choices.

  • marginalism: the idea that value comes from the additional satisfaction you get from one more unit of something

  • law of diminishing marginal utility: an economic law that states that, all else being equal, as consumption increases, the satisfaction derived from each additional unit decreases.

  • perfect competition: envisions many small firms competing with identical products, complete information and no barriers to country. This hardly exists in reality but serves as a benchmark for measuring market efficiency and understanding how prices are determined

Keynesian Economics

  • focused on aggregate command, the total spending in economy

  • during a recession people and businesses save more and spend less

  • negative multiplier effect: consumers save, businesses do not earn, businesses lay off employees who then spend less as consumers and the cycle continues.

  • government must then step in to fill the gap and have money flow again.

  • multiplier effect: an economic term, referring to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal of capital.

Supply Side economics