Table of Contents
- Question 1
- The marginal propensity to consume
- Marx transformation problem
- Invisible hand
- Jevons equation of exchange
- Fisher quantity theory of money
- Question 3. Neoclassical economics
- Question 8. The contribution of Keynes to economics
- Question 10
- Related Economics essays
The marginal propensity to consume
The marginal propensity to consume means the aggregate pay rise that the consumer gets and spends in consumption instead of saving. The Keynesian marginal propensity to consume is calculated as a change of consumption which is divided by the change in income. The basis of this concept is that households always divide their income for savings and consumption. The main idea of Keynes in his theory is that an increase in wages will lead to a subsequent increase in the expenditure. When the salary increases, people will be motivated to consume more because they have cash. The increase in cash at hand always leads to high spending (Kindleberger 34).
Marx transformation problem
The transformation problem is a challenge of coming up with a general rule of transforming the values of the commodities into their prices in the market. In his theory, Marx tried to come up with a solution where he defined the profit of a product as the excess value that emanates from the labor inputs and capital invested. According to Marx, the value of a commodity is derived from the value of inputs that have been used in the production of the commodity. Marx made an assumption that the value of a commodity was proportional to the money and price. One of the most eminent features of the Marx transformation is that he was able to differentiate between various types of costs such as the fixed and variable ones (Hollander 34).
According to Smith, individuals contribute to the society as much as they can. They do not have any intentions to promote public good, and are only motivated by promoting their self-interests. The most important thing is that individuals are promoted by an invisible hand to make great contributions without their intentions. The most eminent thing is that as an individual pursues his interests, he is also promoting the welfare of the society in one way or another. The central argument in this concept is that the economy is regulated by the natural force of the invisible hand. It is because of the efforts made by others that the society is better off (Basu 65).
Jevons equation of exchange
The equation of exchange indicates that if a consumer desires to increase his utility, then the ratio of the marginal utility of any consumed item in relation to its price are equal. If the marginal utility cannot equate with the price, then it is possible for the consumer to change consumption and seek to gain more utility. According to this theory, if an individual has an object that has a lower utility he can always exchange it for another object of higher utility. The main concept is to ensure that there is a proper estimation of utility, otherwise, one party will lose in the exchange (Tieben 252).
Fisher quantity theory of money
According to the theory, the amount of money is the main determinant of the level price or otherwise the value that the money holds. According to Fisher, any change in the money quantity leads to a subsequent change in the level of prices. The main assumption of the Fisher theory is that when all the other factors are constant and the quantity of money increases, the direct result is that the prices will increase by the same amount. The main assumption of this theory is that money is a commodity. Just like other products are affected by demand and supply, the same happens to the money (Diwvedi 223).
Question 3. Neoclassical economics
The neoclassical economics theory focuses on how the perception of the usefulness of a product affects the forces of the market. According to this theory, the customer is always determined to seek utility. The main purpose of the consumer is to optimize the utility that he gets. On the other hand, the company is constantly competing. The company aim is to make a go of sales so that it can increase the profits. The essay explicitly focuses on the tenets of neoclassical theory and its important elements (Murrell 6).
The tenets of the theory are that consumers have a strong perception that a product is always more valuable than the cost used in the production, and through this demand is affected. The tenet means that the cost of production may be very low, but due to a high demand a product that costs very low to produce may fetch a high price (Murrell 6).
Another important tenet is that the bias of making economic choices is the likelihood that the economic option which is preferred will be lucrative in the future. If there is a likelihood that investment will be worth it in the future, then it becomes a viable opportunity. If there is a likelihood that the investment will not be of any benefit in the future, then no one will choose such an option.
The core element of the neoclassical microeconomic theory is the competitive paradigm. According to this element, the economy is made of a set of agents who are well informed and engage in equilibrium transactions (Murrell 6).
The second important element of the neoclassical economics is the free market. The theory states that markets are efficient when they are left alone. The products markets serve an important role in providing the best signal that will allow investment in new activities. In a free market, there is also free movement of labor. Inefficiency in these markets arises when there is government intervention (Murrell 6).
According to the public choice theory, the government cannot do anything in the right way because politicians are filled with vested interests and use their power for their gain. On the other hand, under the market-friendly approach approach, the markets in developing nations have imperfections and, thus, the government intervention is needed in such cases so as to improve markets.
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Another element of the neoclassical economic is that the economic changes, such as prices and interest rates, should serve as important indicators of the changes in the economy. The economic variables should always remain constant if they are to reflect a true change in the economic conditions. The maximizing utility is another element of neoclassicism. Individuals are always determined to ensure that they get the maximum utility from the goods that they buy. The final element is the competitive market. Under this element markets operate well when demand and supply are controlling them (Murrell 6).
In conclusion, the main concept of the neoclassical theory is that consumers are out to seek utility. One of the elements of this theory is that the key indicators of economic changes are prices and interest rates. The idea of competitive market is also another important element of the theory. The theory also has tenets such that the cost of a product is higher than its value.
Question 8. The contribution of Keynes to economics
Keynes contributions to the economy can be traced to his great work in the theory of employment. He created a background for the modern economics on employment. He made significant contributions to economics and is known for his great works. Therefore, it is important to explore the key contribution that Keynes made to economics and discuss how it can be applied in modern economics.
He argued that the employment level depended on the propensity to make investments and to consume. He also put an emphasis on recessions and made a clear argument that a recession will occur when the savings are lower than the expected investment. The theory of interest is also associated with Keynes. He argued that the interest rates will always go down when the propensity to exceed the investments required for the interest rates to fall. He also made another contribution where he argued that the community need for liquidity and the amount of liquidity supplied to the economy by the banking system also plays a role in determining the rate of interest in the economy. The concept of interest rates continues to be very significant in the society today (Kindleberger 14).
Keynes also made an important economic contribution by recognizing the key role of the central bank. It is through his contributions that we have the central bank playing a role in regulating the economy. He argued that the actions of the central bank could play a key role in regulating the interest rates in the economy. Additionally, Keynes made a significant contribution to the economy by introducing the theory of wages. He rejected the old notion which argued that wages fall when the unemployment level goes down. He introduced a very important concept that a decrease in the wages does not in any way influence employment. A fall in the wages leads to a decrease in prices and, thus, the incentives for businesses tend to go down (Kindleberger 14).
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Keynes is also associated with the theory of money. Keynes rejected the theory of supply of money, because he replaced it with his arguments of the aggregate demand. He argued that an increase in the demanded quantity leads to an automatic rise in prices and vice versa. The same happens irrespective of whether there is a low or a high supply of money (Kindleberger 14).
Keynesian economic thoughts are very much applicable in the economy of the XXI century. Most of his ideas are continuously being used all over the world to control the economy. For example, most central banks have taken the role of regulating the interest rates in the economy by utilizing the concept of the money supply that was developed by Keynes. Furthermore, his idea of government creating employment for the unemployed and investing in the public is being actively utilized. The USA and other nations have continuously used the concept in solving the economic problem of unemployment. His concepts have been used repeatedly in the development of economic reforms, especially in the time of financial depression. He had been hailed for his great works in the field of economics, and he is closely associated with solutions to most economic problems that are facing the world economies today (Kindleberger 16).
In conclusion, Keynes has made significant contributions to the science of economics. He developed the theory of wages, the theory of interest and was the first to recognize the role of central bank. His ideas continue to be useful in the modern economics till today.
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Liberalism is an economic concept that argues that the government should not intervene in the ongoing economic. Instead, it should let the economic forces such as demand and supply control the economy. According to this ideology, most of the economic sectors are controlled by individuals and not by government institutions. The concept of liberalism is different from the term of Laissez Faire, which allows the government to establish some control in some of the economic sectors. Economic liberalism supports the government, but they are strong critics of the government control or interference of the functioning of free trade. Both the government and the economic liberalism work together when they are solving issues such as the domination of a private monopoly. Although liberalism papooses government interventions, it recognizes that the government has a key role in providing public goods to people (Colander 205).
The utilitarianism concept is a philosophy widely used in economics and the political world. According to this concept, the main purpose of the market should be to increase the benefits to the people. In all the economic decisions made, the only focus should be on the utility that the members should be getting. The proponents of Unitarianism argue that an economic decision is valid only to the extent that it contributes to the benefit of the people. A deeper analysis of the concept indicates that some people can suffer due to some economic decisions at the expense of other people. The main drawback is the lack of objectivity in measuring the value of an individual action (Beckerman 89).
Malthusianism is a concept derived from the economic and political thoughts of Robert Malthus. According to Malthus, the population growth occurs at a very fast rate. He noted that the produce supply growth should go up according to the population growth. However, he also noted that the rate of food production increases at a very slow rate because the rate of population growth overtakes it. Due to the increasing number of people, there is a strain on resources since they are not produced at the same rate (Hollander 192).
Keynesianism is derived from the ideas of John Keynes on his theory of employment interest and money. In his work, he intended to provide a theoretical basis for the employment policies of the government. In his work, Keynes refutes the claims of another economist who argued that the only way to restore employment is by lowering the wages. According to him, employers cannot employ more people so as to increase production, while the demand of goods produced is not rising. He argued that the low demand for goods is the main cause of unemployment. He also pointed out that the government can play a role in promoting demand through policies and tax cuts ( Kindleberger 4).
Marxism is a method of socioeconomic analysis that originated from Karl Marx and Friedrich Engels. In his theory, Karl Marx underlines everything about the economic structure of the society. Marxism stands against the idea of capitalism. Although the government can introduce policies that can influence the economy, the capitalism in the society cannot solve the problems of unemployment, poverty, and economic crises. According to Marxism, the only way that governments can solve the economic crises is by eliminating capitalism and replacing it with the socialist ideology (Hollander 34).
Question 13. Who are the New Classicals and what is their claim to fame: in what ways have their ideas influenced economic policy in the US and elsewhere in the last 40 years?
The new classical macroeconomics originated from the ideas of Lucas and Leonard Rappings. Their main focus was to provide a microfoundation for the argument of the Keynesian arguments on the labor market. The essay focuses on the New Classicals and how they have influenced economic policies in the US and elsewhere in the past 40 years.
In their theory, they seemed to criticize the ideas of Keynes. They presented a strong argument according to which the equilibrium in the labor market can be achieved when the quantity demanded equals the quantity that is supplied. The scholars also tried to explain the concept of involuntary unemployment where they argued that involuntary unemployment will occur when there is a shortfall of the quantity demanded due to an increase in the quantity supplied. The new classical theory strongly opposes the idea of Keynes that a recession will occur when there is fall in the aggregate demand. Keynes attributed this to the fact that firms tend to produce less, and thus, they only need a few employees (Kindleberger 14).
The New Classicals have refuted this idea and termed it as an irrational one. The involuntary unemployment presents an excellent opportunity for firms to make profits. They will lower their wages and the employees who will be rejecting the new wages will be easily replaced by others since there is an oversupply of labor. Any firm that does not take such an action will not get a chance to optimize. As a result, Keynesian economics tends to rely on the market imperfections, and Keynes has strongly rejected this concept (Kindleberger 14).
One of the factors that led to the rise of fame of the New Classicals is their idea of viewing people as great optimizers. They argue that people are tempted to select the best option available to them. They also present a very strong idea that firms tend to maximize their profits, but people are keen on maximizing the utility that they get. The New Classicals rose to fame due to their strong argument that the prices keep on changing and so the individuals are motivated to change too. As a result, people have to adjust by making new choices and picking preferences, and consequently, the quantity demanded is affected significantly.
The New Classicals have played a very significant role in the US economic formulation. At first, the New Classicals encourage the governments to take control of the market when the market forces cannot control themselves. Through this, the government has been able to adapt fiscal and policy measures that play a role in reviving the markets (Kindleberger 14).
On the other hand, it is through the ideas of the new classical movement that governments have taken a step to control the labor forces by injecting funds so as to create employment. The government has been very active in regulating the labor market through policies such as the minimum wage, which is now a significant element in promoting fair pay for the people. Governments have also adjusted their public expenditures as a way of ensuring that the market forces operate efficiently (Kindleberger 24).
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In conclusion, the new classical theorists have built on the ideas of Lucas and Leonard Rappings. The New Classicals have opposed the ideas of Keynes on equilibrium of employment. The important element that has made them rise to fame is the idea of viewing people as optimizers. Their ideas are continuously being used by world economies in stimulating employment.
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