Economic Theories and Concepts: Mercantilism, Adam Smith, and More

Mercantilism (Dominant from The 16th to the 18th Century) - It's not efficient…Made a small group of people wealthy Emphasis on developing national power, building exports, getting bullion. Favored A large trade surplus, subsidizing big business, low wages.

Adam Smith - Is the "Father of Economics". Was a professor of Moral Philosophy in the Department of Logic. Made The Wealth of Nations in 1776. Describes the Building blocks of national economic wealth. Divisions of labor allows people To specialize Productivity rises up due to improvements in dexterity, ↓ use of Time, and lead to Interconnect Economy. Trade = another building block; leads People to act in their own self-interest. Argued FREE trade benefits all parties. NOT zero-sum "I Pencil”. Thought the "invisible hand" would Guide people who act in their own self-interest to produce benefits for each Other and for society. Government should implement certain public works Projects, public education, and some trade regulations.

Thomas Malthus (1766-1834) - Wrote an Essay on the Principle of Population

Believed Food is necessary, Affection between sexes would continue, Population and food supply would grow At different. Population would outstrip the food supply and MASS STARVATION Would result.

Karl Marx - Communist Manifesto Beliefs. Power and property will concentrate in the hands of a few And eventually create a society of only two classes, the propertied and the Property less. Capitalism will Enslave the worker and they will have few or no rights/power against Employers.. We would be better off if we centralized all instruments of Production in the hand of the state.

Lenin – Strong Marxist who formed the Bolshevik faction of the Social Democratic Party

John Maynard Keynes (1883-1946) –Correctly understood the economy after WWI and Stated publically the problems with the Treaty of Versailles. Innovation will Grow the economy. Believed that government had the responsibility. Criticized SPECULATION. Speculation lacked reason and was destructive to the economy. When Times are good, government should decrease spending (Pull Back). When times are Bad, government should increase spending. Planned the governmental economy and Witnesses a revolution of technology. According to JMK, trade flew freely; Believing markets worked and govt. Doesn’t. If investment exceeds saving, there Will be inflation. If saving exceeds Investment there will be recession. Prices, And especially wages, respond slowly to changes in supply and demand, resulting In periodic shortages and surpluses, especially of labor. Changes in aggregate Demand, whether anticipated or unanticipated, have their greatest short-run Effect on real output and employment, not on prices. Keynesians believe that, Because prices are somewhat rigid, fluctuations in any component of spending—consumption, Investment, or government expenditures—cause output to change.Keynes Argued that full employment could not always be reached by making wages Sufficiently low. In recessions the aggregate demand of economies falls. Economically and socially successful economies have significant contributions From both the government and the private sectors. Keynes’s view that Governments should play a major role in economic management marked a break with The laissez-faire economics of Adam Smith, which held that economies function Best when markets are left free of state intervention. His most important Solution was to spend against wind.Aggregate demand is Influenced by many economic decisions—public and private. Private sector decisions can Sometimes lead to adverse macroeconomic outcome.

Ludwig Earhart – no price/wage control because it would lead to hyper inflation

Prasanta Chandra Mahalanobis - India – Mixed eco. Mathematical formula -

Stagnation – High unemployment, lack of econ. Growth

Friedrich von Hayek - CreatedThe Road to Serfdom = Too Much govt. Spending leads to too much govt. Power = No Freedom. Britain Labor Party – Split Govt. And private ownership. At LSE, Hayek pioneered the economic analysis of the role that information plays In coordinating the division of labor. He later developed a general social Theory stressing the importance of 'spontaneous' orders and institutions, such as Those which characterize a market economy. He believed that government guided by Majority opinion made sense only if that opinion was independent of government, And he believed it best to leave a free play of ideas among the masses in Matters economic.

Margaret Thatcher – influenced by Joseph, headed Cons. Govt. Air wire regulations – discouraged competition, kept prices high. Prices Low, demand high w/o regulations. M.T. Ended govt. Supporting/reg, higher Unemployment, more bankruptcy

Reganomics – sound money and deregulation, Lessen taxes, less spending

Coal Strikes UK. Markets benefit the public. Privatization – sell of govt. Industries to private sector

Milton Friedman - Friedman’s solution to the problems of inflation and Short-run fluctuations in employment and real GNP was a so-called money-supply Rule. If the Federal Reserve Board were required to increase the money supply At the same rate as real GNP increased, he argued, inflation would disappear.

Economics - The study of the allocation and use of scarce resources to satisfy unlimited Human wants. Most models are built with simplifying assumptions.

Net Benefit - The difference between all benefits and all costs.

Causation - A change in one variable makes another variable change.

Correlation = Causation is NOT true: this mistake suggests that because Two variables are correlated that one caused the other to happen and this may NOT be the case

Simplifying Assumption - Is typically made so as to make a point clearer by stripping away excess Detail

Scarce - Not freely available and lacking an infinite source.Something Is scarce as long as there is no freely available infinite source of the Item.

Resource - Anything that is consumed directly or used to make things that will Ultimately be consumed. Basic Resources – Land, Labor, Capital, and Entrepreneurship Of its people.

Increasing Opportunity Cost - Exists when the additional resources required to Produce an additional unit grows as more output is produced. Likely to occur When people are different in their skills.

Constant Opportunity Cost – Exists when… additional unit remains the same as More output is produced. Likely to occur when people are identical in their Skills.

Optimization Assumption - An assumption that suggests that the person in question is trying to maximize Some objective. People make decisions to make themselves as well off as Possible, typically responding to incentives.

Positive Analysis - A form of analysis that seeks to understand the way things are and why they Are that way.

Normative Analysis - A form of analysis that seeks to understand the way things should be.

Example Of a normative statement: The trade deficit must be corrected, if the United States is to remain competitive in world markets.

Inversely Correlated - Temp ↑, Snow Shovel Sales ↓.

Directly Correlated - Temp ↑, Snow Cone Sales ↑.

Market - Any mechanism by which buyers (B) and sellers (S) negotiate and exchange.

Factor Market – B and S of labor and financial capital negotiate an exchange.

Foreign Exchange Market – B and S of the currencies of various countries negotiate an Exchange.

Goods and Services Market – B and S of goods and services negotiate an exchange.

Fallacy of Composition - The mistake in logic that Suggests that the total economic impact of something is always and simply equal To the sum of the individual parts.

The Sum of the individual parts must NOT be confused with the whole.

Trade Off – an opportunity cost. Involves making a sacrifice that must be made to get a Certain product or experience.

Opportunity Cost - The forgone alternative of the choice made.

Production Possibilities Frontier (PPF) – Relates the amounts of different goods that can be produced in a fully Employed society. Models the choices made in setting output alternatives And is a simple model of scarcity and allocation. The underlying reason That there are unattainable points on a production possibilities frontier Diagram is that there is a scarcity of resources within a fixed level of Technology. Model: a simplification of the real world that we can manipulate to Explain the real world. As a result the complexity of Economics, most economic Models are made with simplifying assumptions

Facts

The Largest part of Discretionary Spending in the U.S. 2015 budget was for military.

The Mistake in logic that suggests that the total economic impact of something is Always and simply equal to the sum of the individual parts is Fallacy of Composition.

If Congress passed a bill and Two months later a recession begin/ends then the poor/good policy is an example Of The Fallacy that Correlation is the same as Causation.

One needs to understand that causation and correlation are not the Same

Ceteris paribus - Latin for other things Equal.

Demand - The relationship between price and quantity Demanded, ceteris paribus.

Equilibrium - The point where the amount that consumers want to Buy and the amount firms want to sell are the same.

Equilibrium price - The price at which no consumers wish they could Have purchase more goods at the price; no producers wish they could have sold More.

Equilibrium quantity - The amount of output Exchanged at the equilibrium price.

Law of Demand - The Statement that the relationship between price and quantity demanded is a Negative or inverse one. There is a negative relationship between quantity Demand and price.

Law of Diminishing marginal utility - The amount of additional happiness that you get from an Additional unit of consumption falls with each additional unit.

Law of Supply - The Statement that there is positive relationship between price and quantity Supplied. There is a positive relationship between quantity supplied and price

Marginal cost - The increase in cost Associated with increasing production by one unit. Increasing MC is upward Sloping for supply curve.

Market - Any mechanism by which buyers and sellers Negotiate an exchange.

Quantity demanded - Amount consumers are Willing and able to buy at a particular price during a particular period of Time.

Quantity supplied - Amount firms are willing And able to sell at a particular price during a particular period of time.

Real-balances effect - When a price increases your Buying power is decreased causing you to buy less

Shortage/Excess Demand - The Condition where firms do not want to sell as many goods as consumers want to Buy. QD > QS

Substitution effect - Purchase of less of a Product than originally wanted when its price is high because a lower-cost Product is available. When prices are higher you buy less of what you Originally wanted and use something else instead

Supply and demand - The name of the most important model in all of economics.

Surplus/Excess Supply - The Condition where firms want to sell more goods than consumers want to buy. QD < QS

Variable Costs - Costs that increase when Firms increase production. ↑

• Which is an example of the concept of normal vs. Inferior? SUVs vs. Mac-and-cheese

• Which is an example of the concept of complement vs. Substitute? PB/J vs. Coke and Pepsi

• If the price of a good is expected to ↑ in the future Its demand goes to R and supply goes to L

• An ↑ in income of consumers will cause demand for some Goods to ↑ and for others to fall↓

• If tech ↑, supply goes right (R), If it goes ↓then Supply goes left (L)

• If the price of inputs ↑, supply goes R. If it goes ↓, Supply goes L

• If the number of sellers ↑, supply goes R. If it goes ↓, supply goes L

• If the taste for a good ↑, then demand goes R. If it Goes ↓, then demand goes L

• If demand ↑and price doesn’t change then there will be A shortage

• If supply ↑and price doesn’t change then will be a Surplus

• If demand/supply ↓and price doesn’t change then there Will be a surplus/shortage

• Demand is downward sloping and Supply is upward sloping

• On S and D diagram, the h axis is labeled quantity per Unit and v axisis labeled price

The elasticity of demand refers to the degree to which price affects Quantity demanded.

The mathematical formula for the elasticity of demand includes Both the slope and the price quantity combination.

A change in supply will dramatically affect quantity Much more than price when demand is elastic.

A change in supply will dramatically affect price Much more than quantity when demand is inelastic.

A linear demand curve has elastic and inelastic Points depending on price.

If the percentage change in price is greater than the Percentage change in quantity then demand is inelastic.

If the percentage change in price is less than the Percentage change in quantity then demand is elastic

Elasticity - The responsiveness to a change in another Variable

Price Elasticity of Demand - The responsiveness of quantity demanded to A change in price

Price Elasticity of Supply - The responsiveness of quantity supplied to A change in price

Income Elasticity of Demand - The responsiveness of quantity to a change In income

Cross-Price Elasticity of Demand -The responsiveness of quantity of one good To a change in the price of another good.

Because the demand Curve is downward sloping and the supply curve is upward sloping the elasticity Of demand is negative and the elasticity of supply is positive. Often these Signs are implicit and ignored.

Elastic - The circumstance when the percentage change In quantity is larger than the percentage change in price

Inelastic -The circumstance when the percentage change In quantity is smaller than the percentage change in price

Unitary Elastic - The circumstance when the percentage change In quantity is equal to the percentage change in price

Total Expenditure Rule - If the price and the amount you spend both Go in the same direction, then demand is inelastic, whereas if they go in Opposite directions, demand is elastic

Perfectly Inelastic -The condition of demand when price changes have no effect On quantity

Perfectly Elastic -The condition of demand when price cannot change

Consumer Surplus- The value you get that is in excess of what you pay to get it

On a graph, consumer surplus is the area Below the demand curve and above the price line.

Producer Surplus- The money the firm gets that is In the excess of its marginal costs

On a graph, producer surplus is the area Below the price line and above the supply curve.

Market Failure - The circumstance Where the market outcome is not the economically efficient outcome

Exclusivity -The degree to which The consumption of the good can be restricted be a seller to only those who pay For it

Rivalry - The degree to which One person's consumption reduced the value of the good for the next consumer

Purely Private Good - A good with the Characteristics of both exclusivity and rivalry

Purely Public Good - A good with neither Of the characteristics of exclusivity or rivalry

Excluded Public Good - A good with the Characteristic of exclusivity but not of rivalry

Congestible Public Good - A good with the characteristic of rivalry But not of exclusivity

The Optimality of Equilibrium and Dead Weight Loss - At Equilibrium the sum of producer and consumer surplus is as big as it can be (ABC). Away from equilibrium the sum of producer and consumer surplus is Smaller. The degree to which it is smaller is called the dead weight loss. That Is, it is the loss in societal welfare associated with production being too Little or too great.

Facts

If the price Rises/falls and the total amount consumers spend off the good falls/rises, Then demand must be elastic.

If price falls/rises And the amount consumers spend of the good falls/rises, then demand be inelastic.

If price rises And the amount consumers spend on the good falls to zero, then demand Must be perfectly elastic.

If price rises/falls And the amount consumers spend on the goods remains the same, Then demand is unit elastic.

If every Time price rises and total revenue declines then demand is elastic.

If dramatic Changes in price with slight changes in amount sold, then demand is inelastic.

The Elasticity of demand for gasoline is likely to be small, but grow as time Goes by.

A good like Water has few substitutes and takes up little of our income to purchase, then its Demand is inelastic.

Name brand Apparel has many substitutes and can be very expensive, then its demand is elastic.

Suppose a New law makes illegal the sale off a good that had been legal this will decrease Consumer surplus.

The Elasticity of demand can change with the number of close subs and the time Available to shift to other alts.

Economists Suggest that a market can fail if production or consumption can harm an Innocent third party and if the good or service is such that consumers are Unable to make well-informed decisions about its consumption.