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Neoclassical Microeconomics & Economic Activity

Introduction to Economics

• Economics is present in every aspect of life and encompasses various activities.

• Example: Price of apples - 1.52

Defining Economics

• Economics: "A study of (hu)mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing." - Alfred Marshall

• "The science of production, distribution, and consumption of wealth." - J.B. Say

• "Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses." - Lionel Robbins

• Economics examines economic activity undertaken by individuals in society.

Understanding Economic Activity

• Economic Activity: Any actions aimed at providing a means for individuals to live.

  • Includes:

  • Working

  • Shopping

  • Cooking

  • Childcare

  • Government activities

  • Making something to sell

  • Running a business

  • Volunteering

Non-Economic Activities

• Examples of non-economic activities include:

  • Sleeping

  • Chatting with a friend

  • Meditating

  • Showering

• Reason for Non-Economic Status: They do not involve production, distribution, or consumption.

  • Related to the third-person criterion of defining work.

  • Discussion point: Are these activities considered work? Correlation between economic activity and work.

• Definition of Work: Work is anything you can pay another person to do.

Locations of Economic Activity

• Economic activities occur in various environments:

  • In businesses

  • At workplaces

  • In markets

  • By the government

  • At home

  • In the community

  • Includes different forms of labor, both paid and unpaid.

  • Types of activities:

  • Wage labor

  • Market production

  • Self-employment

  • Volunteering

  • Informal lending

  • Under-the-table jobs

  • Producer cooperatives

  • Consumer cooperatives

  • Non-capitalist firms

  • Activities among friends or gifts between individuals.

Classical Economists and Their Ideas

• Key Economists:

  • Adam Smith

  • Thomas Robert Malthus

  • David Ricardo

• Themes:

  • Early days during the Industrial Revolution and the rise of capitalism.

Main Ideas of Classical Economics

• Specialization: Advocated by both Smith and Ricardo.

• Laissez-faire: Concept that free markets and trade maximize welfare (Ricardo).

• Invisible Hand: The market's self-regulating nature expressed by the market acting in the interest of self-interest (Smith).

• Value of a Commodity: Relates to the labor involved in its production (Smith, Ricardo, Marx).

• Profit as Exploitation: Marx viewed profit as a result of worker exploitation.

Social Implications of Classical Economics

• Consider social ramifications derived from classical economic theories, especially the idea that value stems from labor.

• Issues arising for capitalists include:

  • Worker struggles

  • Class conflict

• Emphasis on exploitation leading to financial corruption and inequality concerns.

Transition from Classical to Neoclassical Economics

• Neoclassical Perspective:

  • Value determination based on supply and demand rather than labor input.

  • Changes focus from labor to market forces as the determinant of value.

  • Economists argue a need for neutrality in the discussion by focusing on supply and demand.

Market Dynamics

• Price Influence: Market price based on how much is available versus how much demand exists.

• Depoliticized Approach: Shifts focus from workers to broader economic indicators.

Overview of Neoclassical Economics

• Core premises include:

  • Markets as starting points for analysis.

  • Value (price) based on supply and demand.

  • Individuals viewed as rational actors seeking self-interest.

  • Recognizes potential market failures where ideal conditions don't apply.

Example of Market Failure

• The Great Depression (1929-1939):

  • Initiated with stock market collapse and led to widespread unemployment and homelessness.

  • Critique of neoclassical economics arose, leading to Keynesian economics advocating for government intervention during economic crises.

Differentiating Microeconomics and Macroeconomics

• Macroeconomics:

  • Studies the economy as a whole and interconnected markets.

  • Deals with aggregates like national income and total output.

  • Informs policies focusing on overall economy-wide efficiency.

• Microeconomics:

  • Examines individual markets and segments.

  • Concentrates on the decision-making of economic units (firms and households).

  • Known as income theory for national income generation.

  • Is referred to as price theory for resource allocation.

Examples from Worksheets

• Micro vs. Macro Examples:

  • Tax on candy affects candy price for consumers: Micro.

  • The 2008 recession causing economy contraction: Macro.

  • Demand for gas decreases due to hybrid cars: Micro.

  • Consumer spending causing inflation: Macro.

In-Class Participation and Reading Quiz

• Four multiple-choice questions worth a total of 10 points.

  • 2 points for proper identification (full name on index card).

  • Students allowed to consult notes but not each other.

Quiz Questions Included

1. Gabby's Monday activity with her grandmother classified as work.

2. The value of a commodity in labor terms attributed to classical economists.

3. Government intervention in market failures linked to Keynesian economics.

4. Identification of market failure conditions: pricing distortions and lack of price reflection.

Schools of Economic Thought

• Heterodox Economics:

  • Includes Marxism, Modern Institutionalism, and Old Institutionalism.

• Neoclassical Economics:

  • Mainstream variables including New Consensus Macroeconomics, Post-Keynesianism, and Monetarism.

• Classical Economics:

  • Early foundational thinkers such as Adam Smith and Karl Marx.

• Marginalist Revolution (1870s-1890s) highlighted new economic insights.