Econ Class 7

**What does test cover?**
- BEP, Opportunity Cost
- Thinkers
	- Adam Smith
	- David Ricardo
	- Karl Marx
	- John Maynard Keynes
	- Milton Friedman
- Economic system, socio-political systems
- Schools of thought
- Example Q: What is the school of thought of this economic system??
- Define opportunity cost in relation to PPF

In Commie economy, the government owns everything.

• Can allocate resources very quickly to an area of need
• No absolute poverty In Socialist economy, the government provides("owns") certain factors of production that are required, where the free market takes care of the rest.

Schools of Thought

Classical Economics

• Classical economic theory was made by Adam Smith
• Advocates for no government intervention in the market place
• Wants the market to sort any economic issues out
• Wants free trade.
  • Saw whole planet as 1 big market.
• Adam was "anti-communist"?
• Coincided with the industrial revolution
• Many fundamental economic theories such as supply and demand were a product of classical economics.
  • Believed supply and demand and the price mechanism will fix the market
• Prior to the rise of classical economics, most economies were under the control of some type of monarch.
• Under these systems, the economy was tightly controlled by the state.
• If the King (or Queen) decides to raise your taxes, there is no one you can complain to
• Classical economics is the opposite of "command and control" systems and became associated with freedom.
• Feudal system was kinda communist??? There was no private entity.
• As feudal systems lose power, it seemed natural economics would be more free.
• The Invisible Hand: metaphor for demand and supply, the forces that move the free market.
  • Individuals work in self interest, and are selfish. However, as everyone works to improve themselves, everyone becomes richer and thus society becomes richer.
• The constant change of pressures on supply and demand create natural movement of prices and the flow of trade.
• Laissez-faire, meaning let it go, in an approach to the market.
• It believes the market will find equilibrium, however, this is untrue, as market always moves towards equilibrium due to there always being a present force for change.
  • Equilibrium can be high or low, Main Classical Economists:
• Adam Smith - wealth of nations
• David Ricardo - free trade, comparative advantage
• Karl Marx - Worried about the worker being abused by the capitalists, is at the end of the classical economist, because he was in the period. However, he perceived a weakness of the classical economics school.

Keynesian Economics

• A school of economic thought founded by john Maynard Keynes and developed by his followers.
• Believed consumers should spend money.
• He placed emphasis from the study of the economic behaviour of individuals and companies to the study of the behaviour of the economy as a whole - i.e. self interest on individual not important.
• The main idea is that aggregate demand (total) is created by household, business, and government.
• Dynamics of free market is NOT the main force of an economy.
  • The nazi's created infrastructure, and helped Germany come out of the great depression early.
  • This is an example of government interference.
• Said that free markets have no self balancing mechanism, and government must interfere.
• Government interference should be through public policies to achieve full employment and price stability.
• During recession, more spending, during boom less spending.
• Employment stimulates aggregate demand
• Keynesian explores when the macroeconomy is in recession, or disequilibrium.

"He advocates interference in the market, more or less government spending depending on circumstances"

Supply side Economics

• Theory that income taxes reduce incentives for work, savings, and investment, and that accelerated economic growth without inflation can be achieved by increasing the supply of goods and services
  • If taxes are cut, individuals will be incentivised to work hard, earn more money, and invest
  • Cut business taxes will lead to employment, investment, etc.
  • There will be no inflation due to investment
• Supply side economics advocates large scale tax cuts, for individuals and corporation, and deregulation of business (they can do anything they want, as it will benefit economy) and strong incentives for investment.
• This doesn't usually works, as 75% of tax cuts received by corps were not invested (donald trump tax cuts). The following happened:
  • Gave bonuses
  • Share buy schemes? They buy shares, so owners get profits
• On individual level, tax cuts had no real impact, as they weren't paying any tax anyways.
  • Their spending didn't change, and their savings didn't improve
• Theory that says increased production drives economic growth.
• Factors of production: Capital, labour, entrepreneurship and land.
• Focuses on businesses and firms. Create jobs, people will go and spend, people will help economic growth, and more jobs will be created.
• Examples:
  • Reaganomics
  • Bush Tax Cuts
  • Trump Tax Cuts
• Economist associated with supply side:
  • Robert Mundell
  • Arthur Laffer
  • Herbert Stein

Keynesian vs Supply side

• Keynesian is driven by aggregate demand. When demand increases, factories will produce stuff for demand
• Supply side says producing things first will lead to people buying it.

Monetarism

• Monetarism is an economic theory that regards the money supply as the most important driver of economic growth. - supply of money is the most important driver of growth???
  • For Classical, its about market, for Keynes, its about aggregate demand, for supply, its about aggregate supply, for monetarism, its about how much money is in circulation. People with more money will spend it, and create high economic growth.
• If you increase the money supply abut x% per year, you will get x% economic growth.
• As money supply grows, people demand more goods, and factories will produce more, creating new jobs and furthering economic growth.
• Increase money supply at exact percentage to prevent inflationary pressures.
• Central banks play a role in monetary pressures as they control the money supply.
• When the money supply increases, the cost of money increases. This leads to more borrowing, lower interest rates, they will spend, and this increases economic growth.
• Interest rates are the cost of money.
• More money out there, cost goes down. Economists:
• Milton Friedman
• Alan Greenspan

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