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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!