Neo-classical economics began around the turn of the century. It provided more analysis on the processes through which the market system allocates economic resources. The application of supply and demand curves, micro-economics and price theory helped to calm many of the disquieting aspects that Marx had created around classical economics. It accomplished this by ignoring the class division and working from the assumption of the existence of the “autonomous” rational wealth maximizer as subject for study. Alfred Marshall was a professor at Cambridge in the late 1890’s. He created the idea that supply and demand can be used to determine a fair price for the exchange of commodities in an industrialized society. These mathematical equilibrium curves assume that people act as rational agents pursuing economic ends. Another assumption required was formulated in Say’s Law, which says that all income must be spent. Hoarding was seen as irrational, and the Continue reading
Economics Basics
Classical Economics
Beginning with the ideas of Adam Smith (An Inquiry into the Nature and Causes of the Wealth of Nations, 1750), including the ideas of David Ricardo, and ending approximately with John Stuart Mill (1850’s) the framework was established for classical economics. Mill in particular established the foundation for free trade in advocating individual libertarian autonomy rights which had the effect of limiting legislative authority in matters effecting the private economy. In the context of 19th Century Europe, this argument makes much sense, monopolies had been granted to crown corporations for most major state projects and independent private business moguls were working toward respectability. In the context of our 21st Century corporate global climate the argument may validly be reversed. It can be argued that individual rights have the effect of lending legitimacy to legislation over matters effecting the private economy. Overall, the first classical theorists began the analysis of Continue reading
Definition of Inflation – Types of Inflation
Definition of Inflation Inflation is commonly understood as a situation of substantial and rapid general increase in the price level and consequent fall the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy. The behavior of general prices is measured through price indices. The trend of price indices reveals the course of inflation or deflation in the economy. Read More about Inflation: Causes and Effects of Inflation The Stages of Inflation Inflation in a Developing Economy Definition of Inflation by Different Economists There is no generally accepted definition of inflation and different Continue reading
Gross National Product (GNP)
Gross National Product (GNP) may be defined as the aggregate market value of all final goods and services produced during a given year. The concept of final goods and services stands for finished goods and services, ready for consumption of households and firms, and exclude raw materials, semi-finished goods and such other intermediary products. More clearly, all sales to households, business investment expenditure, and all government expenditures are obviously regarded as final goods. In an open economy (an economy which has economic relationship with the rest of the world in the form of trade, remittances, investment etc-all economies are open economies), Gross National Product (GNP) may be obtained by adding up: The value of all consumption goods which are currently produced The value of all capital goods produced which is defined as Gross Investment. Gross Investment, in the real sense, here implies the increase in inventories plus gross products of Continue reading
Determinants of Demand
The knowledge of the determinants of market demand for a product or service and the nature of relationship between the demand and its determinants proves very helpful in analyzing and estimating demand for the product. It may be noted at the very outset that a host of factors determines the demand for a product or service. In general, following factors determine market demand for a product or service: Price of the product Price of the related goods-substitutes, complements and supplements Level of consumers income Consumers taste and preference Advertisement of the product Consumers expectations about future price and supply position Demonstration effect or ‘bend-wagon effect’ Consumer-credit facility Population of the country Distribution pattern of national income. These factors also include factors such as off-season discounts and gifts on purchase of a good, level of taxation and general social and political environment of the country. However, all these factors are not Continue reading
The Concept of Supply
Like the term ‘demand’, the term ‘supply’ is also often misused in the ordinary language. Supply of a commodity is often confused with the ‘stock’ of that commodity available with the producers. Stock of a commodity, more or less, will equal the total quantity produced during a period less the quantity already sold out. But we know that the producers do not offer whole of their stocks for sale in the market, a part of industrial produces is kept back in godowns and is offered for sell in the market when it can fetch better prices. In other words the amount offered for sale may be less (or at the most in rare circumstances equal to) than the stocks of the commodity. The term ‘supply’ shows a relationship between quantity and price. By supply we mean various quantities of a commodity which producers will offer for sale at a particular Continue reading