Friday, June 27, 2008

Economics and its basics

When talking about economics one can simply define it to be a branch of social science that studies the production, distribution and consumption of goods and services. In other words it shows the human mentality towards consumption and production of goods and services at a given point or period of time.

Economic can generally be classified into Macroeconomics and Microeconomics.

Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Microeconomics focuses on supply and demand and other forces that determine price levels for specific companies in specific industry sectors.

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as whole and not just on specific companies, but the entire no. of industries within a country. Factors that are religiously followed in macroeconomics are GDP, unemployment rate, national income, rate of growth, price levels and the level of inflation.

The economics of any country be it democratic or communist generally is based upon one of the two principle given below, though I believe that world wide it’s the symmetry principle that’s followed by the majority.

Utilitarian Principle

It simply states that everyone has the basic needs and wants to enjoy life and hence there should be no rich or poor people and that everyone should be equal atleast wealth-wise.

Its motto is “things are not fair if the results are not fair”.

Reasons:

Every individual has the same basic wants and similar capacity to enjoy life.

The millionth dollar spent by a rich man has far lesser marginal benefit than the thousandth dollar spent by a poor man. Hence it makes more sense to transfer the excess money from the rich to the poor.

Tradeoff

The rich person will start to work less and thus the quality of work will fall dramatically.
Cost of transferring the income from the rich to the poor will create a lot of inefficiencies in the whole process
Such a process ultimately shrinks the economic pie

Symmetry Principle

This principle is sort of opposite to the utilitarianism principle. Its just says that pple in similar situations should be treated similarly.

Its motto “Its not fair if the rules aren’t fair”

It follows 2 rules:

Private property must be protected from theft by implementation of strict laws.
Property must be exchanged from one person to another only by voluntary exchange.

Cons

It doesn’t bother about how the economic pie is shared amongst pple hence there raises a natural inequality among pple.

Having just touched the two basic principles, the next in line is the macroeconomic view or the macroeconomic school of thought that one can probably have. They are:

1. Classical view
2. Keynesian view
3. Monetarist view


Classical View

The classical view is about believing that the economy is self regulating and that its always at full employment.

It believes that the economy doesn’t need automatic stabilizers (like loan waiver, providing certain amount of cash to unemployed pple) and that the economy stablizes by itself.

Believes that if there are no disincentives in the economy (like taxes and other externalities), the economy will always be efficient and would expand at a rapid pace.

Aggregate demand

According to Classical view, technological change or advancement has the most significant influence on both aggregate demand and supply since the same amount of capital invested brings in more utility.

Aggregate supply

Believes that the wage rate adjusts quickly (either increases or decreases) to maintain equilibrium in the labour market. This is one point that doesn’t happen in the pragmatic world.

Keynesian View

The term Keynesian is derived from the famous twentieth century economist – John Maynard Keynes.

He believes that the economy, when left alone, will never be at full employment and to achieve full employment there has to be an active fiscal and monetary policy.

Aggregate demand

He believes that peoples expectations has the ultimate significance on aggregate demand and that a wave of pessimism about future profit can lead to a fall in aggregate demand and thus would plunge the economy into recession.

Aggregate supply

Believes that the money wage rate and the prices of goods and services are extremely sticky in the downward direction and hence there would be no automatic stabilization of the economy once it goes into recession.

Monetarist View

Believes that the economy is self regulating and efficient if the monetary policy is not erratic and the pace of money growth is kept steady.

Believes there should be minimum disincentives (likes taxes) for the economy to function smoothly.

Aggregate demand

Quantity of money has the most significant impact on the aggregate demand.

Aggregate supply

Has the same view as Keynesian

Hope a bit of economics helps you. [:)]

No comments: