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MICROECO_LESSONWEEK3_PRELIMS (3)
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Course Information
Course Title: SSM 102a
Subject: Microeconomics
Instructor: Jennifer S. Mayano
Position: SHS HUMSS Teacher / T-III
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Title
Economic Theories
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Definition of Economic Theory
An economic theory is a set of ideas and principles that explain how different economies function.
Economists utilize theories for various purposes based on their roles.
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Purpose of Economic Theory
Aims to develop methods to meet basic human needs for everyone.
Seeks to resolve conflicts of interest non-violently, promoting general welfare and peaceful conflict transformation in society.
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Focus of Economic Theory
Broad field explaining economy functions.
Analyzes how economic agents (individuals, businesses, governments) make decisions.
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Key Areas of Study
Primarily concerned with production, consumption, and distribution of goods and services.
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Economic Activities
Studies how economic activities are coordinated and their effects on individual and societal well-being.
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Foundational Theories in Economics
Outlines major economic theories that form the backbone of economic study.
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Classical Economics Theory (18th and 19th Century)
Key Contributors: Adam Smith, David Ricardo, John Stuart Mill.
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Overview of Classical Economics Theory
Dominant school of thought in the 18th and 19th centuries.
Advocates for free trade and competition with minimal government interference.
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Market Regulation
Classical economists believe free markets self-regulate through supply and demand.
Referenced: "Invisible Hand" theory by Adam Smith as a concept illustrating hidden economic forces.
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Invisible Hand Theory
A metaphor for unseen forces of self-interest in the free market.
Self-interested consumer behavior leads to positive economic outcomes.
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Assumptions of the Invisible Hand
Individuals act selfishly, aiming only for personal gain.
Collective selfishness leads to better societal outcomes than altruistic intentions.
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Core Principles of Invisible Hand Theory
Self-Interest Drives Economic Efficiency
Individuals and businesses act in their best interests, promoting competition, innovation, and efficient resource allocation.
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Market Prices as Signals
Prices determined by supply and demand guide production and consumption decisions.
Scarcity allocation occurs without central planning.
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Minimal Government Intervention
Markets naturally regulate themselves through voluntary exchanges.
Excessive government regulations can disrupt economic balance.
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Examples of Invisible Hand Theory
A baker’s drive for profit leads them to:
Bake high-quality bread to attract customers.
Price competitively to ensure sales.
Contribute to the local economy by hiring workers and paying suppliers.
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Criticisms and Limitations
Market failures can lead to outcomes like monopolies, pollution, and income inequality.
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Public Goods and Externalities
Some goods require government intervention (e.g., national defense, clean air) due to market inefficiency.
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Irrational Behavior
Behavioral economics indicates people do not always behave rationally, leading to inefficiencies.
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Neo-Classical Economics Theory (18th and 19th Century)
Key Contributors: Alfred Marshall, William Stanley Jevons.
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Overview of Neo-Classical Economics
Focus on supply and demand as primary drivers of production, pricing, and consumption.
Emerged around 1900 in response to classical economics.
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Price Determinants
Classical economists emphasize production costs, while neoclassical emphasizes consumer perception of value.
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Economic Surplus
Economic surplus is the difference between actual production costs and retail price.
Influences businesses and government market regulation decisions.
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Critiques of Neo-Classical Theory
Fails to consider factors like limited information and emotional decision-making.
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Keynesian Economics (1930s - Present)
Key Contributor: John Maynard Keynes.
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Overview of Keynesian Economics
Focuses on total spending in the economy and its effects on output, employment, and inflation.
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Spending Fluctuations
Suggests that rigid prices result in changes in output due to fluctuations in consumption, investment, or government spending.
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Importance of Government Interventions
Argues for government intervention to stabilize economies during recessions.
Aggregate demand is crucial for economic growth.
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Fiscal Policies
Government spending and taxation can regulate economic cycles, a core idea in Keynesian economics.
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Malthusian Economics
Key Contributor: Thomas Malthus.
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Overview of Malthusian Economics
Population growth is exponential, while the growth of food supply is linear, leading to resource depletion and possible population decline.
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Key Concepts
Population growth may exceed food supply growth, creating crises that reduce living standards.
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Malthusian Theory
Key Ideas:
Population Growth is Exponential: Grows geometrically.
Food Supply Grows Arithmetically: Agricultural production doesn't keep up.
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Malthusian Catastrophe
Occurs when population surpasses food production, leading to famine, disease, and war that reduce the population, restoring balance.
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Preventive vs. Positive Checks
Preventive Checks: Voluntary measures to control population (e.g., moral restraint, delayed marriage).
Positive Checks: Factors that increase death rate (e.g., famine, disease).
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Marxist Economics Theory
Key Contributor: Karl Marx.
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Overview of Marxist Economics Theory
Based on Karl Marx's critique of capitalism, particularly in works like "Das Kapital" and "The Communist Manifesto."
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Core Principles of Marxian Theory
Historical Materialism: Economic systems evolve in stages (e.g., feudalism to socialism).
Economic base influences politics, culture, and institutions.
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Labor Theory of Value (LTV)
Product value determined by labor amount involved in production.
Capitalists exploit workers by paying less than the value they produce.
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Alienation of Labor
Workers become disconnected from products, production processes, fellow workers, and their own potential under capitalism.
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Economic Crisis in Capitalism
Capitalism instabilities due to overproduction, automation replacing jobs, and increasing inequality.
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Transition to Socialism & Communism
Marx predicts capitalism will collapse, leading to a proletariat revolt and a transition to socialism and eventually communism.
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Laissez-Faire Theory
Translates to "allow to do," promoting autonomy in economic decision-making.
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Overview of Laissez-Faire Theory
Economic philosophy advocating minimal government intervention in markets.
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Core Principles of Laissez-Faire Economics
Free Market System: Prices and allocation determined by supply and demand without government restrictions.
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Minimal Government Intervention
Intervention limited to protecting property rights, enforcing contracts, and ensuring national defense, opposing tariffs and excessive regulations.
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Self-Regulating Economy
Economic growth driven by individual actions for personal interests, guided by "invisible hand" theory.
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Private Property and Competition
Property rights incentivize productivity; healthy competition fosters innovation and quality.
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Market Socialism Theory
Key Contributors: Karl Marx, Friedrich Engels.
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Overview of Market Socialism
Combines communal ownership of production with a market economy framework.
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Economic System Characteristics
Blends capitalism and socialism: community ownership alongside market-driven pricing.
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Decentralized Decision-Making
Allows for competition within a socialist framework, unlike classic socialism with centralized control.
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Key Features of Market Socialism
Public or Collective Ownership: Ownership held by government, employees, or cooperatives, not private individuals.
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Market Mechanisms
Prices, wages, and production levels determined by supply and demand rather than central planning.
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Profit Motive with Redistribution
Businesses aim for profits but often share earnings with employees or reinvest for social services.
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State Regulation
Government plays a role in reducing inequality and ensuring competition by regulating the economy.
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Workers Participation
Emphasis on employee self-management, involving workers in decision-making processes.
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Examples of Market Socialism in Practice
Yugoslavia (1950s-1980s): Worker self-management in state-owned enterprises.
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Examples of Market Socialism in Practice
China’s Socialist Market Economy: Mix of state-owned and private enterprises in a market-driven setup.
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Examples of Market Socialism in Practice
Nordic Models: Countries like Sweden and Norway blend market policies with strong social welfare and public ownership in key sectors.
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Monetarism
Macro theory focusing on economic stability through monetary supply control.
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Fundamental Tenet of Monetarism
Economic growth relies on the total money in circulation within the economy.
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Regulatory Role
Strong emphasis on government regulation of money supply for economic stability.
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Milton Friedman
Leading advocate for monetarism advocating for steady and predictable money supply increases for stability.
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Inflation Risks of Money Printing
Printing more money can lead to inflation, resulting in price increases of goods and services.
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Hyperinflation and Its Impact
Excessive money printing can lead to hyperinflation, rapidly decreasing currency value.
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Loss of Purchasing Power
Excess currency in circulation reduces currency value, affecting consumer purchasing power.
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Currency Devaluation
Risk of losing credibility internationally, raising import costs, and provocation of economic turmoil.
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Importance of Monetary Policy
Central banks monitor money supply to balance inflation and economic growth priorities (e.g., BSP).
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Tragedy of the Commons
Introduced by Garrett Hardin, it explains the over-exploitation of shared resources.
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Theory's Explanation
Individuals with unrestricted access deplete resources out of self-interest.
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Consequences
Overuse results in shared resource depletion, harming the long-term interests of all users.
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How It Works
Common resources (clean air, water) are overused as individuals seek maximum personal benefit.
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Resulting Depletion
Overexploitation leads to degradation of resources, ultimately harming all parties involved.
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Real-World Examples
Overfishing: Decreases fish populations affecting all fishermen.
Deforestation: Consequences include soil erosion and climate change.
Traffic Congestion: Excess vehicles slow transport for everyone.
Air Pollution: Caused by industries and vehicles, public health is at risk.
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Possible Solutions
Government Regulation: Laws to limit resource use (e.g., fishing quotas).
Privatization: Assigns ownership for sustainable resource management.
Community Management: Local groups regulate resource usage effectively.
Market-Based Solutions: Taxes or fees to discourage overuse (e.g., carbon tax).
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Human Growth Theory
New growth theory asserts human desire continually drives productivity and economic growth.
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Economic Growth Drivers
Driven by knowledge, innovation, and human capital, rather than physical resources.
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Knowledge as a Resource
Unlike physical resources, knowledge is non-depleting (e.g., software can be replicated).
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Innovation and Economic Progress
Growth occurs through investments in research and development.
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Importance of Human Capital
Education and skills enhance productivity and technological advancements.
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Role of Government and Institutions
Supportive policies for education and entrepreneurship drive long-term growth.
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Moral Hazard Theory
Describes contracts entered into in bad faith historically observed in various systems.
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Definition of Moral Hazard
Occurs when one party assumes excessive risks without bearing full consequences.
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Causes of Moral Hazard
Protection from risks leads to careless or reckless actions.
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Risk-Taking Without Consequences
Lack of full-cost suffering may lead to greater risks (e.g., reckless driving due to insurance).
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Information Asymmetry
Risk-takers often possess more information than the other parties involved.
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Prevalence in Multiple Sectors
Seen in banking (risky loans based on guarantees), insurance (excessive doctor visits), and employment (lax worker productivity).
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Conclusion on Economic Theory
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Conclusion on Economic Theory
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Conclusion on Economic Theory
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Conclusion on Economic Theory
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Conclusion on Economic Theory
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Acknowledgement
Thank You!
NoteStudied by 7 peopleNoteStudied by 31 peopleNoteStudied by 22 peopleNoteStudied by 6 peopleNoteStudied by 142 peopleNoteStudied by 17 people