1. Executive summary
Globalization is a phenomenon that has become one of the key management issues of the beginning of the 21st century. Globalization presents both opportunities and threats: opportunities in the sense of economic abundance, freedom of political expression and cultural diversity; threats in the form of economic insecurity, political instability and cultural decay. The development of globalization is not an isolated historical event, but also is the latest phase in the evolution of international business and the integration of the world economy. One global trading influences all the organization of different sizes, from micro-firms to multi-national corporations, accompanying both good and bad results.
2. Terms of reference and procedure
Globalization is treated as a process that is beneficial- a key to future world economic development. It is inevitable and irreversible. As it has become key issues of management, finding out more about globalization is one of our academic purposes. The main ways of producing this report are researching from relative texts, reports and web sites.
Globalization, the ‘big idea’ of the late twentieth century, lacks precise definition. Nonetheless, carrying different connotations for different people, it’s believed that there is a broadening, deepening and speeding up of world-wide interconnectedness in all aspects of life, from the cultural to the criminal, the financial to the environmental. More than this, the world is being moulded, by economic and technological forces, into a shared economic and political arena.
Globalization could significantly expand plenty of opportunities in parts of trade, international investment, and technological advances, but it could also expand a lot of risks all around the world.
‘In the developing world, poverty continues to increase in absolute terms, and the gap between ‘successful?and ‘unsuccessful?countries is widening. In the industrialized world, unemployment has reaches levels not witness since the 1930s and, in some countries, income inequalities are wider than at any time this century.?
It is hard to say whether globalization is good or bad, depending on focused issues. Following we will talk about the development of globalization and how it affects organizations of all sizes.
4.1 The Development of Globalization
4.1.1 The Development of Globalization
The original and continuing fundamental of economic globalization is trade. Since World War II, the global trade has increased significantly. The composition of global trade has altered greatly. Many industrialized countries of the West were involved in ‘free trade? they started a process of removing barriers to the free flow of goods, services and capital between nations. In that situation, more trading partnership have been established. Under GATT (General Agreement on Tariffs and Trade) eight rounds of trade agreements between 130 nations were conducted to lower barriers to trade. Last round (Uruguay Round) resulted in the creation of The World Trade Organization (WTO) to police international trade. All these things declined barriers to trade and increased technological capabilities.
Lowering trade barriers made globalization possible and changing technology made it a reality. The sharp growth of the internet and World Wide Web has provided a means to rapidly communicate with international markets.
‘Improvements in transportation technology including jet transport, temperature controlled containerized shipping, and coordinated ship-rail-truck systems have made firms better able to respond to international customer demands. Notice the world is getting smaller.?(2001, http://www-biz.aum.edu/jclark/305/Chpt_1.htm, accessed 10/01/02)
The development of technology creates new international business opportunities. In its turn, globalization affects technological change. Access to international markets enables firms to recoup higher costs of developing new technologies. As a consequence of these trends, the new environment offers more opportunities to modern commerce. But is also more complex and competitive than a generation ago.
Following is a diagram for illuminating the development of globalization. (Data from Waters Malcolm, 1998, P159)
4.1.2 What is Globalization?
In very single instance, the word ‘globalization?seems to have a different meaning. Nevertheless, ‘most commentators would identify two fundamental elements: an ever accelerating pace of international economic integration combined with rapid population growth and improved education levels in developing countries.?(Wes Marina, 1996, P1)
At a business level, globalization is thought when companies decide to take part in the emerging global economy and establish themselves in foreign markets. First they will adapt their products or services to the new markets. Then, they might take advantage of the Internet revolution and establish multilingual corporate web sites or even as an e-business.
A well- balance definition of globalization is provided in a report on a symposium on the globalization of industry organized by the OECD industry Committee (1994,P191), held in December 1993. The symposium comprised government officials and corporate officers brought together to discuss globalization. The group of representatives agreed that the key elements of globalization are:
?The organization of production on an international scale, enabling firms to establish a presence in major foreign markets, gain efficiencies and customize products for local markets.
?The acquisition of inputs and supporting services from around the world, enabling firms to exploit the specialization of many countries and minimize costs.
?The formation of cross- border alliances and joint ventures with other companies, enabling firms to combine assets, share costs and enter new markets.
4.2 How It Affects Organizations of All Sizes
Today, globalization is a major driver that has impact on nearly every business. Operating a business in different countries means different cultures, political systems, economic systems, legal systems, and different levels of economic development. The internationalization of markets for sales and purchasing at least indirectly influences every business. All of these will impact the firm’s ability to direct business. As a result, management within an international environment is very complex. There are thousands of organizations by different sizes in the world, how are they affected by globalization?
4.2.1 Small and Medium-Sized Enterprises (SMEs)
Small and Medium Enterprises (SMEs) are an important and integral part of the national economy. Though globalization and IT are creating new opportunities for them, they are also faced with many difficult challenges. SMEs play a crucial role in economic and social development. They need to be strengthened in order to sustain and develop.
In Larry Downes?article Beyond Porter, he says that technological progress in logistics and distribution enables nearly every business to buy, sell and cooperate on a global scale. Similarly, customers have the chance to compare prices globally in order to find the best offer. As a result, even smaller and local businesses have to see themselves in a global context, even if they do not intend to launch their own import or export activities. Doubtless, a major strength for many SMEs is their close customer contact and their ability to maintain close customer relationships.
The contribution of SMEs is important in economic growth, job creation, local development and social cohesion. ‘Dynamic SME sector is important for restructuring economies and combating poverty. It is important to avoid simply picking up other country’s schemes for adoption without understanding the background of it, may fail. Therefore, customizing those schemes to fit their own context, their own conditions and situations, is essential.?(R.M.P.Hewaliyanage, 2001, http://www.isbc2001.org/home/RMP%20Hewaliyanage.pdf, accessed 10/01/02)
There are numerous advantages and disadvantages in relation to globalization as SMEs:
1. For those SMEs depending on a limited number of people, they may be stable and have long-term thinking, perspectives. In addition, they have high identification with the business and high commitment. So there is no pressure for them for thinking about short-term success. On the other hand, they may have difficulties to adapt corporate culture to new situations and challenges. In this kind of firms, owners and managers are often the same persons. To be honest, the owners are usually limited to the experiences and the knowledge. It is not good for the development of the firms.
2. For those simple structures?SMEs, they may have high flexibility and adaptability. And the communication and cooperation within the organization may cross functionally. So they will have a good relationship between employees and managers. Nevertheless, in many cases, they are not suitable for the complex planning and implementing of international activities.
3. For those small size SMEs, their basics are for specialization, so they may often successful with niche strategies. On the contrast, in terms of financial methods and manpower, they have limited resources. For instance, their spending for market research and market entry take a much higher proportion of total spending in SMEs than in larger businesses. They may be lack of internationally experienced employees and have limited number of staff to take on additional tasks.
The SMEs need to make effort in order to be successful in economic globalization.
The owners and managers of SMEs ought to be convinced that exporting international markets is a strategically important step for the businesses long-term development. Only then, they will be able to overcome the numerous risks and problems, which accompany internationalization of a business. Furthermore, to make an SME or any business a global business requires an openness to change among the owners and the management team. So the heads of the firm must have international exposure and acquire experience in overseas?markets and cultures. Finally, every SME has to understand that internationalization of a business involves a process of great change. This change requires taking risks, opening up the firm’s culture and a great capacity to learn.
4.2.2 Multi- national Enterprises (MNEs)
The main focus for many hopes and fears about economic globalization is the MNE (Multi-National Enterprise). The MNE seems Janus, the two-faced symbol of globalization. ‘For critics of capitalism they are the vehicles by which intolerable and inhuman practices of exploitation are spread across the globe, and for its friends they are the virtuous sources of investment, technology transfer and the upgrading of the labour force.?(Waters Malcolm, 1998, P79)
Generally speaking, the headquaters of the MNE are in the home country, but the operations are in the others. Usually they have three common characteristics: ‘I) They must respond to many different environments. II) Strength of MNE’s come from their ability to pool resources. III) Organizational structure and culture is important for planning and controlling resources.?(1999, http://www.qub.ac.uk/mgt/staff/siobhaine/sem2.pdf. accessed 11/01/02) IV) These multi-national firms offer a standardized product world-wide, they attempt to create a standardization of tastes and preferences, like Coca-Cola and McDonalds.
So why the large firms would like to become MNEs. Except huge profits, there are some reasons. First, becoming international companies can avoid over reliance on home base. Moreover, it is undoubtedly that there are many opportunities in overseas and less competitions. The less costs of labour and resource might be another reason.
The expansion of world trade has not been lost on companies catering to mass consumer markets. Indeed, corporate executives have long been advised that: ‘The globalization of markets is at hand?(Levitt 1983 P92). Today the world’s 500 largest MNEs, based in the United States, the European Union, and Japan. They account for more than 90% of the world’s volume of FDI and about half of world trade. Yet these MNEs are not really “global.” Most of them are intra-regional, rather than inter- regional.
For example, the American fast food operator, McDonald’s, for example, faces huge competitions at home market that is expanding by less than 5 per cent a year and in which it already has 90,000 outlets. The only possibility for increased profitability is globalization. This it is doing- two-thirds of the outlets it opens each year are now outside the USA where only two-thirds of all its restaurants are now located. It is also engaged in transferring its management culture to regional centers, for example, to Hong Kong for expansion into China. (The Economist 13/11/93 P69-70)
A classical example of a ‘villainous?MNE might be General Motors but only about a third of its assets and a third of its sales are outside the USA (and most of these are in first-world Canada, Europe and Australia). Perhaps a more appropriate example of a ‘true?multi-national might be the Swiss-Swedish engineering group, Asea Brown Boveri or the Dutch Electronics firm, Philips, each of which have over 85 per cent of their sales outside their country of origin. (Waters Malcolm, 1998, P76, data from Emmott 1993 P6)
Boeing might be the best aircraft company in the world. Boeing gains from their excellence. This is considered a global web of suppliers. ‘In the production of its 777, Boeing’s latest commercial airliner contains 132,500 major component parts that are produced around the world by 545 suppliers. Countries represented in the production include Japan, Singapore and Italy. Boeing also gains potential access to the markets where these supplier relationships exist.?(2001, http://www-biz.aum.edu/jclark/305/Chpt_1.htm, accessed 10/01/02)
From all the evidences mentioned above, we can realize that globalization has gone through a long historical development and economic and technological evolutions. In additional, it presents both positive and negative results on different sizes of organizations.
Economics Term Papers - Simon Kuznets, Father of GDP
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Kuznets immigrated to the United States in 1922; 15 years after his father had emigrated. His father changed the family name to Smith, but the young Kuznets favored his unique name. He was educated at Columbia University, in receipt of his Ph.D. in 1926.
After completion of graduate studies, he spent a year and a half as Research Fellow of the Social Science Research Council (1925-1926). In 1927 he joined the National Bureau of Economic Research, working with its founder, Wesley Mitchell. As a member of the staff of the National Bureau of Economic Research, from 1927 to the early 1960s, he worked mostly on national income and capital formation in the United States and as Chairman of the Social Science Research Council Committee on Economic Growth (1949-1968). It was there that Kuznets developed his groundbreaking studies of U.S. national income and his more general work on economic time series, resultant in comprehensive studies of the economic growth of nations. He afterward taught at a number of universities University of Pennsylvania, 1930-54; Johns Hopkins, 1954-60; Harvard, 1960-71. (Simon Kuznets, November 1992)
His work emphasized the difficulty of fundamental economic data, stressing the significance of large numbers of comments and the limitations of simple models based on one stage of historical experience. According to Kuznets, economic data must include information on population structure, technology, the excellence of labor, government structure, trade, and markets in order to give an accurate model. In particular, he stressed, on the source of the statistical series that he accumulated, how little of economic growth can be attributed in the conservative way to the buildup of labor and capital. He also described the existence of recurring variations in growth rates now called "Kuznets cycles" and their links with fundamental factors such as population. (Simon Kuznets, November 1992)
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Simon Kuznets is best recognized for his studies of national income and its components. Previous to World War I, measures of GNP were rough deductions at best. No government agency collected data to compute GNP, and no private economic researcher did so methodically, also. Kuznets changed all that. With work that began in the thirties and long-drawn-out over decades, Kuznets computed national income back to 1869. He busts it down by industry, by final product, and by use. He also measured the distribution of income between rich and poor.
Kuznets's development of measures of savings, consumption, and investment came the length of just as Keynes's ideas about how national income is strong-minded created a demand for such measures. Thus, Kuznets helped go forward the Keynesian revolt. Kuznets's measures also helped go forward the study of econometrics recognized by Ragnar Frisch and Jan Tinbergen.
Simon Kuznets is certainly not a familiar name in the current debate on social transformation in western cities. This is almost certainly explained by his naturalistic move toward, his preoccupation with nations and his emphasis on industrialization. It is important to notice, though, that the center model has been extended to comprise education, energy consumption, population features and political rights. An updated version of the Kuznets curve is thus based on a number of factors that are relevant to present-day urbanization. More significant is the fact that later hypothetical developments have rendered 'laws of succession' so devalued that they appear to belong to a prehistory of trivialities. That reason alone, but also the subject-matter, makes it useful to appraisal modern frameworks and theories next to the backdrop of Kuznets' model.
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Kuznets' notion that a flourishing economy adds to progressive redeployment seems particularly unsuitable from the point of view of polarization theory. In the formulation of its leading advocate, the polarization thesis contends that we are entering a phase of 'centers and eccentricity', whereby increasing poverty and increasing wealth coexist in the same cities, often in adjacent neighborhoods. The decline of the manufacturing sector and the following rise of the service sector have produced two trends: first, a growing upper tier of high-skilled jobs with high wages and, second, a huge expansion of low-wage, often temporary, and part-time service jobs. The latter trend is recognized as a structural result of the first, generated through a demand for consumer services such as catering, cleaning, clothing and observation. It is also an explicit assumption that polarization in the labor market leads to increasing overall disparity of earnings. This is of course basically at odds with neo-classical theory, which assumes that a rise in the relative demand for consumer services will strengthen the position of workers inside those labor market segments, and thus hold back or completely counterweight the pressure towards greater disparity. According to Sassen, such a simple competitive model does not capture the prototype of change. (Simon Smith Kuznets, January 1938.)
Partly, there are flaws in the labor market due to a functionally coordinated supply of low-skilled immigrants. Partly, the new economy is based on an absolute exploitive institutional setting: Finally, much work that was once standardized mass production is today more and more typified by customization, flexible specialization, networks of subcontractors, and in formalization, even at time counting sweatshops and industrial home-work. In brief, the changes in the supply obvious in major cities are a function of new sectors as well as of the reform of work in both the new and the old sectors”. Similar statements are rather frequent in labor market changes, and they could be rephrased understandingly as follows: firms have changed the way they utilize labor in reply to an unsure economic environment. (Simon Smith Kuznets, July 1989)
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Thus, at one level the polarization thesis contrasts completely with the Kuznets model. The suspected way of change is conflicting, and modernization is portrayed in terms of fragmentation, rivalry and split interests rather than integration, agreement and mutual benefits. The latter distinction stems from different views on advanced technology. Simon Kuznets placed substantial emphasis on long-term effects of shifts in the labor force from agriculture to the modern sector of the economy. Given that agrarian and industrial technology correspond to a high respectively low level of disparity, a rather simple deduction follows: overall disparity will at any point in time depend on the family member size of each sector, the degree of inequality within each sector and the dissimilarity in mean inequality between the two sectors. Polarization theorists, by difference, perceive a dualism within the modern sector, that is, within the new service economy. Though the causal chain is overly complex, there seems to be in the end a quite simple notion of dual technological requirements. To be spirited, firms need to maintain a pool of highly skilled labor, but they do no longer need to connect in the fate of low-skilled labor. (Anindya Datta June 1987)
The skills mismatch thesis and its derivative, the spatial mismatch thesis, are easier to go with Kuznets proposition. The variables accountable for increasing disparity are found in technology, economic restructuring and global competition. The basic supposition is that the post-industrial society requires less 'muscle labor' and more 'smart labor'. Because there is a lack of the latter, at least in a middle phase, one of the inevitable results is an increase in the wages of workers with high skills. By the same logic, less skilled or unsuitably skilled workers suffer relation wage losses or, worse, are excluded from the labor market.
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A supply and demand clarification of this kind does not evoke notions of essence or fundamental needs: there are no implications in terms of institutional rule or a permanent shift in the sharing of income, wealth or job opportunities. Instead, disparity of each kind could be interpreted as 'short swings' in a steady-state development or, alternatively, as episodes in the contingent development of history. The first understanding offers a slight possibility of full agreement with Kuznets' model. It is not hard to imagine a fundamental chain that starts with economic depression, continues with skills mismatch and increasing disparity, continues further with supply side changes, and leads back to square one with economic recovery and moribund inequality. The second interpretation provides a common ground, though minimal, in the postulation of transitional effects. Kuznets was quite aware of complications related to the communication between population growth and the growth of capital. In fact, population growth due to decrease in death rates is almost certainly a major reason why the curve bends.
(Simon Smith Kuznets, September 1965.)
Many economists consider that Kuznets got his 1971 Nobel Prize for his measurement in national income accounting, and surely that was enough to merit the prize. But in fact, he got the prize for his experiential work on economic growth. In this work Kuznets recognized a new economic era which he called "modern economic growth" that began in northwestern Europe in the last half of the eighteenth century. The growth spread south and east and by the end of the nineteenth century had attained Russia and Japan. In this era per capita income rose by about 15 percent or more each decade, amazing that had not happened in earlier centuries.
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One of Kuznets's more startling findings was the result of economic growth on income distribution. In poor countries, found Kuznets, economic growth greater than before the income difference between rich and poor people. In wealthier countries, economic growth narrowed the difference. In addition, Kuznets examined and quantified the recurring nature of production and prices in distances of fifteen to twenty years. Such trade cycles, while doubtful, are often referred to as "Kuznets cycles."
Kuznets, Simon, “Economic Development, the Family and Income Distribution: Selected Essays”, Cambridge University Press, July 1989.
Datta, Anindya, “Growth and Equity: A Critique of the Lewis-Kuznets Tradition, with Special Reference to India”, Oxford University Press, Incorporated, June 1987.
Kuznets, Simon, Fogel, Library Binding, University of Chicago Press, November 1992.
Kuznets, Simon Smith, “Commodity Flow and Capital Formation”, National Bureau of Economic Research, Incorporated, January 1938.
Kuznets, Simon Smith, “Economic Change: Selected Essays in Business Cycles, National Income, and Economic Growth”, Greenwood Publishing Group, Incorporated, June 1983.
Kuznets, Simon Smith, “Economic Growth and Structure”, Norton, W. W. & Company, Inc. / September 1965.
Kuznets, Simon, “Autobiography” August 8, 2002 http://www.nobel.se/economics/laureates/1971/kuznets-autobio.html
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1.) Write an essay on the assumption of the “Rational Self Interest”. Make sure that you touch on each of the three components of this assumption that we discussed in class. Comment on the relevance of this assumption in our daily lives.
Economics is defined as how we make choices with scarce resources to obtain our own needs, wants and desires. The Assumption of Rational Self –interests tells us that the definition of rationality means not doing something that will deliberately cause harm. We are told that with every decision we make, we must weigh the rewards against the punishments and that it is actually necessary for us to ask the question “What is in it for me”. There is actually a difference between acting selfishly and acting on the best of our own self- interest. Acting selfishly means that in doing so, you are causing harm to others. Acting in your own self- interest actually benefits others. Adam Smith is known as the father of Economics. In 1776 he purchased The Nature and Causes of the Wealth of Nations. Today the title has been shortened and is known as Wealth of Nations. Smith was asking the question, why powerful countries such as Spain and Portugal collapsed while a small country such as England thrived. The biggest difference he found was that while Spain and Portugal denied their colonies education, England encouraged it. Smith believed that governments have to give people incentive to do well. He stated that self-interest should be encouraged in every person. When people understand their strengths and weaknesses, then they are able to specialize in their field. Specialization leads to better productivity and wealth. Smith speaks of what he calls the Invisible hand theory. This is when a person acts on his own self- interest and in doing so without knowing betters the whole community. Smith said year after year the population would grow. Because production must be increased to feed everybody, he encouraged innovation. Smith was one of the first.
Economics is an interesting subject to study. The term paper assignments in the subject can also be handled in an interesting way if you put in a little effort. Making an economics term paper project an enjoyable affair is not impossible. You just need to have an interesting economics term paper topic to explore and an authentic thesis to work on. There is absolutely no dearth of research topics in economics. Hence, finding a good one would be easy enough if you know what you want and what your limitations are.
There are many options you can consider while looking around for a suitable topic for your economics term paper. But remember to take note of the guideline instructions regarding the topic. You need to find a topic which would fit into all the clauses mentioned in the guidelines.
Here are some suggestions regarding the topics which you can consider for your economics term paper.Based on Economists
You may choose any one of the famous economists as your economics term paper topic. You will find many names under the list like:
• Adam Smith
• Alfred Marshall
• Thomas Robert Malthus
• William Stanley Jevons
There are numerous theories regarding the various aspects of economics. If you can find an interesting thesis to work on, those theories would prove to be excellent economics term paper topics. To list some of them out, there is the:
• Theory of value
• Money supply theory
• Strategy game theory
• BOP theory
Numerous events have been recorded in the history of economics, due to the influence it has had on the economic situations in various countries. Some examples are:
• Economic depressions
• Economic recessions
• Economic breakdowns
• Economic reforms
There are many branches and divisions of economics which you can study as the topic of your economics assignments. This would include:
• Economic geography
• Economic sociology
• Institutional economics
You can also choose to study the economic history of any one of the numerous nations. You can consider:
• Japanese economic history
• Indian economic history
• British economic history
• American economic history
There are numerous topics which you can base your economics term paper on. All you need to ensure is that the topic you choose fulfills all the requirements of the project.
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January 24, 2014
Week 2 Journal Entry
Topics covered in week 2 of Survey of Economics included: specialization and why it leads to a higher standard of living, why the United States economy cannot be considered as a pure market capitalist economy, how self-interest helps to achieve society's economic goals, the contrast of how a market system and a command economy try to cope with economic scarcity, and why private property and the protection of property rights is so critical to the success of the market system. Relative to the topics discussed are important vocabulary terms such as command system, market system, specialization, consumer sovereignty, and “invisible hand”.
Specialization is a method of production in which each person concentrates on a limited number of productive activities, rather than a full range of goods and services. Specialization allows for a higher standard of living because neither time nor money is wasted in the production of a good that one does not efficiently produce. This is how the division of labor comes into play. Specialization increases the total output society derives from limited resources.
. in a pure market capitalist economy, the government has a very limited role. This is not so for the United States. Our government plays a major role in the economy by providing rules for economic activity, promoting economic stability and growth, and providing certain goods and services that would otherwise be under produced or not produced at all, and modifying the distribution of income. The way the U.S. economy operates challenges the definition of a pure market capitalist economy.
In the market system, self-interest is the motivating force of the various economic units as they express their free choices. Self-interest helps achieve society's economic goals because each economic unit tries to achieve its own particular goal, usually requiring the delivery of something of value to others. There is a wide variety of desired goods.
Economics is the social science that analyzes the production. distribution. and consumption of goods and services [ 1 ]. The term economics comes from the Ancient Greek οἰκονομία ( oikonomia , "management of a household, administration") from οἶκος ( oikos , "house") + νόμος ( nomos , "custom" or "law"), hence "rules of the house(hold)". [ 2 ] Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences. [ 3 ]
Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, [ 4 ] education, [ 5 ] the family. health. law. politics, religion, [ 6 ] social institutions. war, [ 7 ] and science. [ 8 ] At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism. [ 9 ]
Common distinctions are drawn between various dimensions of economics. The primary textbook distinction is between microeconomics. which examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics. which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. Other distinctions include: between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus"); [ 10 ] and between rational and behavioral economics .Contents Microeconomics
Economists study trade, production and consumption decisions, such as those that occur in a traditional marketplace .
In Virtual Markets, buyer and seller are not present and trade via intermediates and electronic information. Pictured: São Paulo Stock Exchange.Markets
Microeconomics is the study of economics analysing individual players of a market and the structure of such markets. It deals with, as it's irreducible base unit, private, public and domestic players. Microeconomics studies how these players interact with each other through individual markets (assuming that there is a scarcity of tradable units and government regulation. A market might deal with a product (such as apples, aluminium and mobile phones), or with services of a factor of production. (brick laying, book printing, food packaging). Microeconomics theory considers the aggregates (the sum of) of quantity demanded by buyers and quantity supplied by sellers, studying each possible price per unit (i.e. supply and demand). It studies the complex interaction between market players both through buying and selling. Theory holds that markets may reach equilibrium between "quantity demanded" and "quantity supplied" (supply and demand) over time.
Micro economics also examines various market structures such as perfect competition (where the market involves a minimum quantity of players and a sufficient quantity of product traded); monopoly (one dominant or sole supplier in a market) and the affect these kinds of markets have on economic efficiency. Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all markets. This method studies both changes in markets and their interactions leading towards equilibrium. [ 11 ]Production, cost, and efficiency
In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defense, small-pox vaccinations, etc.) or private goods (new computers, bananas, etc.), and "guns" vs. "butter" .
Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice .". [ 12 ] The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone. leisure. or anything else that provides the alternative benefit (utility ). [ 13 ]
Inputs used in the production process include such primary factors of production as labour services, capital (durable produced goods used in production, such as an existing factory), and land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.
Economic efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely-accepted general standard is Pareto efficiency. which is reached when no further change can make someone better off without making someone else worse off.
An example PPF with illustrative points marked
The production-possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case an economy can produce just two goods (say "guns" and "butter"). The PPF is a table or graph (as at the right) showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.
Scarcity is represented in the figure by people being willing but unable in the aggregate to consume beyond the PPF (such as at X ) and by the negative slope of the curve. [ 14 ] If production of one good increases along the curve, production of the other good decreases. an inverse relationship. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter. The slope of the curve at a point on it gives the trade-off between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. Along the PPF. scarcity implies that choosing more of one good in the aggregate entails doing with less of the other good. Still, in a market economy. movement along the curve may indicate that the choice of the increased output is anticipated to be worth the cost to the agents.
By construction, each point on the curve shows productive efficiency in maximizing output for given total inputs. A point inside the curve (as at A ), is feasible but represents production inefficiency (wasteful use of inputs), in that output of one or both goods could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment during a business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency ) if it does not produce a mix of goods that consumers prefer over other points.
Much applied economics in public policy is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the "essence of economics," where the subject "makes its unique contribution." [ 15 ]Specialization
Specialization is considered key to economic efficiency based on theoretical and empirical considerations. Different individuals or nations may have different real opportunity costs of production, say from differences in stocks of human capital per worker or capital /labour ratios. According to theory, this may give a comparative advantage in production of goods that make more intensive use of the relatively more abundant, thus relatively cheaper, input. Even if one region has an absolute advantage as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative advantage and thereby gain from trading with a region that lacks any absolute advantage but has a comparative advantage in producing something else.
It has been observed that a high volume of trade occurs among regions even with access to a similar technology and mix of factor inputs, including high-income countries. This has led to investigation of economies of scale and agglomeration to explain specialization in similar but differentiated product lines, to the overall benefit of respective trading parties or regions. [ 16 ]
The general theory of specialization applies to trade among individuals, farms, manufacturers, service providers, and economies. Among each of these production systems, there may be a corresponding division of labour with different work groups specializing, or correspondingly different types of capital equipment and differentiated land uses. [ 17 ]
An example that combines features above is a country that specializes in the production of high-tech knowledge products, as developed countries do, and trades with developing nations for goods produced in factories where labor is relatively cheap and plentiful, resulting in different in opportunity costs of production. More total output and utility thereby results from specializing in production and trading than if each country produced its own high-tech and low-tech products.
Theory and observation set out the conditions such that market prices of outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-cost outputs. In the process, aggregate output may increase as a by-product or by design. [ 18 ] Such specialization of production creates opportunities for gains from trade whereby resource owners benefit from trade in the sale of one type of output for other, more highly valued goods. A measure of gains from trade is the increased income levels that trade may facilitate. [ 19 ]Supply and demand
The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase (that is, right-shift) in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve (S).
Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy. [ 20 ] The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics. it applies to price and output determination for a market with perfect competition. which includes the condition of no buyers or sellers large enough to have price-setting power .
For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is 'constrained utility maximization' (with income and wealth as the constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred.
The law of demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy of it (other things unchanged ). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect). Other factors can change demand; for example an increase in income will shift the demand curve for a normal good outward relative to the origin, as in the figure.
Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit-maximizers. meaning that they attempt to produce and supply the amount of goods that will bring them the highest profit. Supply is typically represented as a directly-proportional relation between price and quantity supplied (other things unchanged). That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement.
Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes the price down. The model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply.
For a given quantity of a consumer good, the point on the demand curve indicates the value, or marginal utility. to consumers for that unit. It measures what the consumer would be prepared to pay for that unit. [ 21 ] The corresponding point on the supply curve measures marginal cost. the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a perfectly competitive market. supply and demand equate marginal cost and marginal utility at equilibrium. [ 22 ]
On the supply side of the market, some factors of production are described as (relatively) variable in the short run, which affects the cost of changing output levels. Their usage rates can be changed easily, such as electrical power, raw-material inputs, and over-time and temp work. Other inputs are relatively fixed. such as plant and equipment and key personnel. In the long run, all inputs may be adjusted by management. These distinctions translate to differences in the elasticity (responsiveness) of the supply curve in the short and long runs and corresponding differences in the price-quantity change from a shift on the supply or demand side of the market.
Marginalist theory. such as above, describes the consumers as attempting to reach most-preferred positions, subject to income and wealth constraints while producers attempt to maximize profits subject to their own constraints, including demand for goods produced, technology, and the price of inputs. For the consumer, that point comes where marginal utility of a good, net of price, reaches zero, leaving no net gain from further consumption increases. Analogously, the producer compares marginal revenue (identical to price for the perfect competitor) against the marginal cost of a good, with marginal profit the difference. At the point where marginal profit reaches zero, further increases in production of the good stop. For movement to market equilibrium and for changes in equilibrium, price and quantity also change "at the margin": more-or-less of something, rather than necessarily all-or-nothing.
Other applications of demand and supply include the distribution of income among the factors of production. including labour and capital, through factor markets. In a competitive labour market for example the quantity of labour employed and the price of labour (the wage rate) depends on the demand for labour (from employers for production) and supply of labour (from potential workers). Labour economics examines the interaction of workers and employers through such markets to explain patterns and changes of wages and other labour income, labour mobility, and (un)employment, productivity through human capital. and related public-policy issues. [ 23 ]
Demand-and-supply analysis is used to explain the behavior of perfectly competitive markets, but as a standard of comparison it can be extended to any type of market. It can also be generalized to explain variables across the economy. for example, total output (estimated as real GDP ) and the general price level. as studied in macroeconomics. [ 24 ] Tracing the qualitative and quantitative effects of variables that change supply and demand, whether in the short or long run, is a standard exercise in applied economics. Economic theory may also specify conditions such that supply and demand through the market is an efficient mechanism for allocating resources. [ 25 ]Firms
People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through firms. The most obvious kinds of firms are corporations. partnerships and trusts. According to Ronald Coase people begin to organise their production in firms when the costs of doing business becomes lower than doing it on the market. [ 26 ] Firms combine labour and capital, and can achieve far greater economies of scale (when the average cost per unit declines as more units are produced) than individual market trading.
In perfectly-competitive markets studied in the theory of supply and demand, there are many producers, none of which significantly influence price. Industrial organization generalizes from that special case to study the strategic behavior of firms that do have significant control of price. It considers the structure of such markets and their interactions. Common market structures studied besides perfect competition include monopolistic competition. various forms of oligopoly. and monopoly. [ 27 ]
Managerial economics applies microeconomic analysis to specific decisions in business firms or other management units. It draws heavily from quantitative methods such as operations research and programming and from statistical methods such as regression analysis in the absence of certainty and perfect knowledge. A unifying theme is the attempt to optimize business decisions, including unit-cost minimization and profit maximization, given the firm's objectives and constraints imposed by technology and market conditions. [ 28 ]Uncertainty and game theory
Uncertainty in economics is an unknown prospect of gain or loss, whether quantifiable as risk or not. Without it, household behavior would be unaffected by uncertain employment and income prospects, financial and capital markets would reduce to exchange of a single instrument in each market period, and there would be no communications industry. [ 29 ] Given its different forms, there are various ways of representing uncertainty and modelling economic agents' responses to it. [ 30 ]
Game theory is a branch of applied mathematics that considers strategic interactions between agents, one kind of uncertainty. It provides a mathematical foundation of industrial organization. discussed above, to model different types of firm behavior, for example in an oligopolistic industry (few sellers), but equally applicable to wage negotiations, bargaining. contract design. and any situation where individual agents are few enough to have perceptible effects on each other. As a method heavily used in behavioral economics. it postulates that agents choose strategies to maximize their payoffs, given the strategies of other agents with at least partially conflicting interests. [ 31 ] [ 32 ] In this, it generalizes maximization approaches developed to analyze market actors such as in the supply and demand model and allows for incomplete information of actors. The field dates from the 1944 classic Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. It has significant applications seemingly outside of economics in such diverse subjects as formulation of nuclear strategies, ethics. political science. and evolutionary biology. [ 33 ]
Risk aversion may stimulate activity that in well-functioning markets smooths out risk and communicates information about risk, as in markets for insurance. commodity futures contracts, and financial instruments. Financial economics or simply finance describes the allocation of financial resources. It also analyzes the pricing of financial instruments, the financial structure of companies, the efficiency and fragility of financial markets. [ 34 ] financial crises. and related government policy or regulation. [ 35 ]
Some market organizations may give rise to inefficiencies associated with uncertainty. Based on George Akerlof 's "Market for Lemons" article, the paradigm example is of a dodgy second-hand car market. Customers without knowledge of whether a car is a "lemon" depress its price below what a quality second-hand car would be. [ 36 ] Information asymmetry arises here, if the seller has more relevant information than the buyer but no incentive to disclose it. Related problems in insurance are adverse selection. such that those at most risk are most likely to insure (say reckless drivers), and moral hazard. such that insurance results in riskier behavior (say more reckless driving). Both problems may raise insurance costs and reduce efficiency in driving otherwise willing transactors from the market ("incomplete markets "). Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard. Information economics. which studies such problems, has relevance in subjects such as insurance, contract law. mechanism design. monetary economics. and health care. [ 37 ] Applied subjects include market and legal remedies to spread or reduce risk, such as warranties, government-mandated partial insurance, restructuring or bankruptcy law, inspection, and regulation for quality and information disclosure. [ 38 ] [ 31 ]Market failure
Pollution can be a simple example of market failure. If costs of production are not borne by producers but are by the environment, accident victims or others, then prices are distorted.
The term "market failure " encompasses several problems which may undermine standard economic assumptions. Although economists categorise market failures differently, the following categories emerge in the main texts. [ 39 ]
Information asymmetries and incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies, as discussed above.
Natural monopoly. or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of failure of competition as a restraint on producers. The problem is described as one where the more of a product is made, the lower the unit costs are. This means it only makes economic sense to have one producer.
Public goods are goods which are undersupplied in a typical market. The defining features are that people can consume public goods without having to pay for them and that more than one person can consume the good at the same time.
Externalities occur where there are significant social costs or benefits from production or consumption that are not reflected in market prices. For example, air pollution may generate a negative externality, and education may generate a positive externality (less crime, etc.). Governments often tax and otherwise restrict the sale of goods that have negative externalities and subsidize or otherwise promote the purchase of goods that have positive externalities in an effort to correct the price distortions caused by these externalities. [ 40 ] Elementary demand-and-supply theory predicts equilibrium but not the speed of adjustment for changes of equilibrium due to a shift in demand or supply. [ 41 ]
In many areas, some form of price stickiness is postulated to account for quantities, rather than prices, adjusting in the short run to changes on the demand side or the supply side. This includes standard analysis of the business cycle in macroeconomics. Analysis often revolves around causes of such price stickiness and their implications for reaching a hypothesized long-run equilibrium. Examples of such price stickiness in particular markets include wage rates in labour markets and posted prices in markets deviating from perfect competition .
Macroeconomic instability. addressed below, is a prime source of market failure, whereby a general loss of business confidence or external shock can grind production and distribution to a halt, undermining ordinary markets that are otherwise sound.
Environmental scientist sampling water
Some specialised fields of economics deal in market failure more than others. The economics of the public sector is one example, since where markets fail, some kind of regulatory or government programme is the remedy. Much environmental economics concerns externalities or "public bads ".
Policy options include regulations that reflect cost-benefit analysis or market solutions that change incentives, such as emission fees or redefinition of property rights. [ 42 ]Public sector
Main articles: Economics of the public sector and Public finance
Public finance is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. The subject addresses such matters as tax incidence (who really pays a particular tax), cost-benefit analysis of government programs, effects on economic efficiency and income distribution of different kinds of spending and taxes, and fiscal politics. The latter, an aspect of public choice theory. models public-sector behavior analogously to microeconomics, involving interactions of self-interested voters, politicians, and bureaucrats. [ 43 ]
Much of economics is positive. seeking to describe and predict economic phenomena. Normative economics seeks to identify what economies ought to be like.
Welfare economics is a normative branch of economics that uses microeconomic techniques to simultaneously determine the allocative efficiency within an economy and the income distribution associated with it. It attempts to measure social welfare by examining the economic activities of the individuals that comprise society. [ 44 ]Macroeconomics
Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of general-equilibrium theory. [ 45 ] Such aggregates include national income and output. the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy .
In order to proceed with this examination it is necessary to envisage the macroeconomics system or (social organization of the greater community or nation) in a form that can be easily understood and appreciated. This is done by means of a macroeconomics model, which is a general expression of the system that is useful for purposes of discussion. The model can take a number of different forms including block diagrams, algebraic equations, mechanical analogy, electronic analogy, Leontief Matrix, etc. A suitable model for use in representing the macroeconomic system is shown in the illustration for a closed macroeconomics system without including "The Rest of The World". Money circulates around this model and goods, services, valuable legal documents etc. pass in return between the 6 entities or agents (also sometimes called sectors) that comprise the basic structure of the system. The system flows of money, goods etc. continuously try to self-adjust, in order to attain a condition of equilibrium.
Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition. [ 46 ] This has addressed a long-standing concern about inconsistent developments of the same subject. [ 47 ]
Macroeconomic analysis also considers factors affecting the long-term level and growth of national income. Such factors include capital accumulation, technological change and labor force growth. [ 48 ]Growth
Growth economics studies factors that explain economic growth – the increase in output per capita of a country over a long period of time. The same factors are used to explain differences in the level of output per capita between countries, in particular why some countries grow faster than others, and whether countries converge at the same rates of growth.Business cycle
The economics of a depression were the spur for the creation of "macroeconomics" as a separate discipline field of study. During the Great Depression of the 1930s, John Maynard Keynes authored a book entitled The General Theory of Employment, Interest and Money outlining the key theories of Keynesian economics. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.
He therefore advocated active policy responses by the public sector. including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle [ 50 ] Thus, a central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. John Hicks ' IS/LM model has been the most influential interpretation of The General Theory .
Over the years, the understanding of the business cycle has branched into various schools, related to or opposed to Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics with neoclassical economics. stating that Keynesianism is correct in the short run, with the economy following neoclassical theory in the long run.
In contrast, the New Keynesian school retains the rational expectations assumption, however it assumes a variety of market failures. In particular, New Keynesians assume prices and wages are "sticky ", which means they do not adjust instantaneously to changes in economic conditions.
Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the new Keynesians see full employment as being automatically achieved only in the long run, and hence government and central-bank policies are needed because the "long run" may be very long.Inflation and monetary policy
The Federal Reserve sets monetary policy as the central bank of the United States.
Money is a means of final payment for goods in most price system economies and the unit of account in which prices are typically stated. It includes currency held by the nonbank public and checkable deposits. It has been described as a social convention, like language, useful to one largely because it is useful to others.
As a medium of exchange. money facilitates trade. Its economic function can be contrasted with barter (non-monetary exchange). Given a diverse array of produced goods and specialized producers, barter may entail a hard-to-locate double coincidence of wants as to what is exchanged, say apples and a book. Money can reduce the transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money in exchange, rather than what the buyer produces. [ 52 ]
At the level of an economy. theory and evidence are consistent with a positive relationship running from the total money supply to the nominal value of total output and to the general price level. For this reason, management of the money supply is a key aspect of monetary policy. [ 53 ]Fiscal policy and regulation
National accounting is a method for summarizing aggregate economic activity of a nation. The national accounts are double-entry accounting systems that provide detailed underlying measures of such information. These include the national income and product accounts (NIPA), which provide estimates for the money value of output and income per year or quarter.
NIPA allows for tracking the performance of an economy and its components through business cycles or over longer periods. Price data may permit distinguishing nominal from real amounts. that is, correcting money totals for price changes over time. [ 54 ] The national accounts also include measurement of the capital stock. wealth of a nation, and international capital flows. [ 55 ]International economics
International trade studies determinants of goods-and-services flows across international boundaries. It also concerns the size and distribution of gains from trade. Policy applications include estimating the effects of changing tariff rates and trade quotas. International finance is a macroeconomic field which examines the flow of capital across international borders, and the effects of these movements on exchange rates. Increased trade in goods, services and capital between countries is a major effect of contemporary globalization. [ 56 ]
The distinct field of development economics examines economic aspects of the development process in relatively low-income countries focusing on structural change. poverty. and economic growth. Approaches in development economics frequently incorporate social and political factors. [ 57 ]
Economic systems is the branch of economics that studies the methods and institutions by which societies determine the ownership, direction, and allocation of economic resources. An economic system of a society is the unit of analysis.
Among contemporary systems at different ends of the organizational spectrum are socialist systems and capitalist systems. in which most production occurs in respectively state-run and private enterprises. In between are mixed economies. A common element is the interaction of economic and political influences, broadly described as political economy. Comparative economic systems studies the relative performance and behavior of different economies or systems. [ 58 ]Practice
Contemporary economics uses mathematics. Economists draw on the tools of calculus. linear algebra. statistics. game theory. and computer science. [ 59 ] Professional economists are expected to be familiar with these tools, while a minority specialize in econometrics and mathematical methods.Theory
Mainstream economic theory relies upon a priori quantitative economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of ceteris paribus . which means holding constant explanatory variables other than the one under consideration. When creating theories, the objective is to find ones which are at least as simple in information requirements, more precise in predictions, and more fruitful in generating additional research than prior theories. [ 60 ]
In microeconomics. principal concepts include supply and demand. marginalism. rational choice theory. opportunity cost. budget constraints. utility. and the theory of the firm. [ 61 ] [ 62 ] Early macroeconomic models focused on modeling the relationships between aggregate variables, but as the relationships appeared to change over time macroeconomists were pressured to base their models in microfoundations .
The aforementioned microeconomic concepts play a major part in macroeconomic models – for instance, in monetary theory. the quantity theory of money predicts that increases in the money supply increase inflation. and inflation is assumed to be influenced by rational expectations. In development economics. slower growth in developed nations has been sometimes predicted because of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers. Sometimes an economic hypothesis is only qualitative . not quantitative. [ 63 ]
Expositions of economic reasoning often use two-dimensional graphs to illustrate theoretical relationships. At a higher level of generality, Paul Samuelson 's treatise Foundations of Economic Analysis (1947) used mathematical methods to represent the theory, particularly as to maximizing behavioral relations of agents reaching equilibrium. The book focused on examining the class of statements called operationally meaningful theorems in economics, which are theorems that can conceivably be refuted by empirical data. [ 64 ]Empirical investigation
Economic theories are frequently tested empirically. largely through the use of econometrics using economic data. [ 65 ] The controlled experiments common to the physical sciences are difficult and uncommon in economics, [ 66 ] and instead broad data is observationally studied ; this type of testing is typically regarded as less rigorous than controlled experimentation, and the conclusions typically more tentative. However, the field of experimental economics is growing, and increasing use is being made of natural experiments.
Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size, economic significance, and statistical significance ("signal strength") of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic, rather than certain, sense. Acceptance is dependent upon the falsifiable hypothesis surviving tests. Use of commonly accepted methods need not produce a final conclusion or even a consensus on a particular question, given different tests, data sets. and prior beliefs.
Criticism based on professional standards and non-replicability of results serve as further checks against bias, errors, and over-generalization, [ 62 ] [ 67 ] although much economic research has been accused of being non-replicable, and prestigious journals have been accused of not facilitating replication through the provision of the code and data. [ 68 ] Like theories, uses of test statistics are themselves open to critical analysis, [ 69 ] although critical commentary on papers in economics in prestigious journals such as the American Economic Review has declined precipitously in the past 40 years. This has been attributed to journals' incentives to maximize citations in order to rank higher on the Social Science Citation Index (SSCI). [ 70 ]
In applied economics, input-output models employing linear programming methods are quite common. Large amounts of data are run through computer programs to analyze the impact of certain policies; IMPLAN is one well-known example.
Experimental economics has promoted the use of scientifically controlled experiments. This has reduced long-noted distinction of economics from natural sciences allowed direct tests of what were previously taken as axioms. [ 71 ] In some cases these have found that the axioms are not entirely correct; for example, the ultimatum game has revealed that people reject unequal offers.
In behavioral economics. psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his and Amos Tversky 's empirical discovery of several cognitive biases and heuristics. Similar empirical testing occurs in neuroeconomics. Another example is the assumption of narrowly selfish preferences versus a model that tests for selfish, altruistic, and cooperative preferences. [ 72 ] These techniques have led some to argue that economics is a "genuine science." [ 9 ]Profession
The professionalization of economics, reflected in the growth of graduate programs on the subject, has been described as "the main change in economics since around 1900". [ 73 ] Most major universities and many colleges have a major, school, or department in which academic degrees are awarded in the subject, whether in the liberal arts. business, or for professional study; see Master of Economics .
The Nobel Memorial Prize in Economic Sciences (commonly known as the Nobel Prize in Economics) is a prize awarded to economists each year for outstanding intellectual contributions in the field. In the private sector, professional economists are employed as consultants and in industry, including banking and finance. Economists also work for various government departments and agencies, for example, the national Treasury. Central Bank or Bureau of Statistics.Related subjects
Law and economics, or economic analysis of law, is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of legal rules, to assess which legal rules are economically efficient. and to predict what the legal rules will be. [ 74 ] A seminal article by Ronald Coase published in 1961 suggested that well-defined property rights could overcome the problems of externalities. [ 75 ]
Political economy is the interdisciplinary study that combines economics, law, and political science in explaining how political institutions, the political environment, and the economic system (capitalist. socialist, mixed) influence each other. It studies questions such as how monopoly. rent-seeking behavior, and externalities should impact government policy. [ 76 ] Historians have employed political economy to explore the ways in the past that persons and groups with common economic interests have used politics to effect changes beneficial to their interests. [ 77 ]
Energy economics is a broad scientific subject area which includes topics related to energy supply and energy demand. Georgescu-Roegen reintroduced the concept of entropy in relation to economics and energy from thermodynamics. as distinguished from what he viewed as the mechanistic foundation of neoclassical economics drawn from Newtonian physics. His work contributed significantly to thermoeconomics and to ecological economics. He also did foundational work which later developed into evolutionary economics. [ 78 ]
The sociological subfield of economic sociology arose, primarily through the work of Émile Durkheim. Max Weber and Georg Simmel. as an approach to analysing the effects of economic phenomena in relation to the overarching social paradigm (i.e. modernity ). [ 79 ] Classic works include Max Weber 's The Protestant Ethic and the Spirit of Capitalism (1905) and Georg Simmel 's The Philosophy of Money (1900). More recently, the works of Mark Granovetter. Peter Hedstrom and Richard Swedberg have been influential in this field.History
Main articles: History of economic thought and History of macroeconomic thought
Economic writings date from earlier Mesopotamian. Greek. Roman. Indian subcontinent. Chinese. Persian. and Arab civilizations. Notable writers from antiquity through to the 14th century include Aristotle. Xenophon. Chanakya (also known as Kautilya), Qin Shi Huang. Thomas Aquinas. and Ibn Khaldun. The works of Aristotle had a profound influence on Aquinas, who in turn influenced the late scholastics of the 14th to 17th centuries. [ 80 ] Joseph Schumpeter described the latter as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary. interest, and value theory within a natural-law perspective. [ 81 ] [ not in citation given ]
1638 painting of a French seaport during the heyday of mercantilism
Two groups, later called 'mercantilists' and 'physiocrats', more directly influenced the subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in the colonies. [ 82 ]
Physiocrats. a group of 18th century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with a single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire. which called for minimal government intervention in the economy. [ 83 ]
Modern economic analysis is customarily said to have begun with Adam Smith (1723–1790). [ 84 ] Smith was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections" as "perhaps the purest approximation to the truth that has yet been published" on the subject. [ 85 ]Classical political economy
Publication of Adam Smith 's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline." [ 86 ] The book identified land, labor, and capital as the three factors of production and the major contributors to a nation's wealth.
Smith discusses the benefits of the specialization by division of labour. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry" and a "fundamental principle of economic organization." [ 87 ] To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory – that, under competition, owners of resources (labor, land, and capital) will use them most profitably, resulting in an equal rate of return in equilibrium for all uses (adjusted for apparent differences arising from such factors as training and unemployment). [ 88 ]
In Smith's view, the ideal economy is a self-regulating market system that automatically satisfies the economic needs of the populace. He described the market mechanism as an "invisible hand" that leads all individuals, in pursuit of their own self-interests, to produce the greatest benefit for society as a whole. Smith incorporated some of the Physiocrats' ideas, including laissez-faire, into his own economic theories, but rejected the idea that only agriculture was productive.
In his famous invisible-hand analogy, Smith argued for the seemingly paradoxical notion that competitive markets tended to advance broader social interests, although driven by narrower self -interest. The general approach that Smith helped initiate was called political economy and later classical economics. It included such notables as Thomas Malthus. David Ricardo. and John Stuart Mill writing from about 1770 to 1870. [ 89 ] The period from 1815 to 1845 was one of the richest in the history of economic thought. [ 90 ]
While Adam Smith emphasized the production of income, David Ricardo focused on the distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labor and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits.
Malthus cautioned law makers on the effects of poverty reduction policies
Thomas Robert Malthus used the idea of diminishing returns to explain low living standards. Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing population against a limited amount of land meant diminishing returns to labor. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level.
Malthus also questioned the automatic tendency of a market economy to produce full employment. He blamed unemployment upon the economy's tendency to limit its spending by saving too much, a theme that lay forgotten until John Maynard Keynes revived it in the 1930s.
Coming at the end of the Classical tradition, John Stuart Mill parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between the market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith wrote that the "real price of every thing. is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity. [ 91 ] Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium.Marxism
The Marxist school of economic thought comes from the work of German economist Karl Marx .
Marxist (later, Marxian) economics descends from classical economics. It derives from the work of Karl Marx. The first volume of Marx's major work, Das Kapital . was published in German in 1867. In it, Marx focused on the labour theory of value and what he considered to be the exploitation of labour by capital. [ 92 ] The labour theory of value held that the value of an exchanged commodity was determined by the labor that went into its production.Neoclassical economics
A body of theory later termed 'neoclassical economics' or 'marginalism' formed from about 1870 to 1910. The term 'economics' was popularized by such neoclassical economists as Alfred Marshall as a concise synonym for 'economic science' and a substitute for the earlier, broader term 'political economy '. [ 93 ] This corresponded to the influence on the subject of mathematical methods used in the natural sciences. [ 3 ]
Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium, affecting both the allocation of output and the distribution of income. It dispensed with the labour theory of value inherited from classical economics in favor of a marginal utility theory of value on the demand side and a more general theory of costs on the supply side. [ 94 ] In the 20th century, neoclassical theorists moved away from an earlier notion suggesting that total utility for a society could be measured in favor of ordinal utility. which hypothesizes merely behavior-based relations across persons. [ 22 ] [ 95 ]
In microeconomics. neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. [ 22 ] In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics. [ 96 ]
Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalize earlier analysis, such as econometrics. game theory. analysis of market failure and imperfect competition. and the neoclassical model of economic growth for analyzing long-run variables affecting national income.Keynesian economics
John Maynard Keynes (right), was a key theorist in economics.
Keynesian economics derives from John Maynard Keynes. in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as a distinct field. [ 97 ] The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low "effective demand " and why even price flexibility and monetary policy might be unavailing. Such terms as "revolutionary" have been applied to the book in its impact on economic analysis. [ 98 ]
Keynesian economics has two successors. Post-Keynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research on micro foundations for their models is represented as based on real-life practices rather than simple optimizing models. It is generally associated with the University of Cambridge and the work of Joan Robinson. [ 99 ]
New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimizing behavior but with a narrower focus on standard Keynesian themes such as price and wage rigidity. These are usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones.Chicago School of economics
Main article: Chicago school (economics)
The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Milton Friedman and monetarists, market economies are inherently stable if the money supply does not greatly expand or contract. Ben Bernanke. current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression. [ 100 ]
Milton Friedman effectively took many of the basic principles set forth by Adam Smith and the classical economists and modernized them. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business should be “to use its resources and engage in activities designed to increase its profits. (through) open and free competition without deception or fraud.” [ 101 ]Other schools and approaches
Main article: Schools of economics
Other well-known schools or trends of thought referring to a particular style of economics practiced at and disseminated from well-defined groups of academicians that have become known worldwide, include the Austrian School. the Freiburg School. the School of Lausanne. post-Keynesian economics and the Stockholm school. Contemporary mainstream economics is sometimes separated into the Saltwater approach of those universities along the Eastern and Western coasts of the US, and the Freshwater, or Chicago-school approach.Criticism
"The dismal science " is a derogatory alternative name for economics devised by the Victorian historian Thomas Carlyle in the 19th century. It is often stated that Carlyle gave economics the nickname "the dismal science" as a response to the late 18th century writings of The Reverend Thomas Robert Malthus. who grimly predicted that starvation would result, as projected population growth exceeded the rate of increase in the food supply. However, the actual phrase was coined by Carlyle in the context of a debate with John Stuart Mill on slavery. in which Carlyle argued for slavery, while Mill opposed it.
Some economists, like John Stuart Mill or Leon Walras. have maintained that the production of wealth should not be tied to its distribution. The former is in the field of "applied economics" while the latter belongs to "social economics" and is largely a matter of power and politics. [ 103 ]
In The Wealth of Nations. Adam Smith addressed many issues that are currently also the subject of debate and dispute. Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate a government into doing their bidding. In Smith's day, these were referred to as factions. but are now more commonly called special interests, a term which can comprise international bankers, corporate conglomerations, outright oligopolies, monopolies, trade unions and other groups. [ 104 ]
Economics per se, as a social science, is independent of the political acts of any government or other decision-making organization, however, many policymakers or individuals holding highly ranked positions that can influence other people's lives are known for arbitrarily using a plethora of economic concepts and rhetoric as vehicles to legitimize agendas and value systems, and do not limit their remarks to matters relevant to their responsibilities. [ citation needed ] The close relation of economic theory and practice with politics [ 105 ] is a focus of contention that may shade or distort the most unpretentious original tenets of economics, and is often confused with specific social agendas and value systems. [ 106 ] Notwithstanding, economics legitimately has a role in informing government policy. It is, indeed, in some ways an outgrowth of the older field of political economy. Some academic economic journals are currently focusing increased efforts on gauging the consensus of economists regarding certain policy issues in hopes of effecting a more informed political environment. Currently, there exists a low approval rate from professional economists regarding many public policies. Policy issues featured in a recent survey of AEA economists include trade restrictions, social insurance for those put out of work by international competition, genetically modified foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical profession, organ donations, unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart, casinos, ethanol subsidies, and inflation targeting. [ 107 ]
In Steady State Economics 1977, Herman Daly argues that there exist logical inconsistencies between the emphasis placed on economic growth and the limited availability of natural resources. [ 108 ]
Issues like central bank independence, central bank policies and rhetoric in central bank governors discourse or the premises of macroeconomic policies [ 109 ] (monetary and fiscal policy ) of the state. are focus of contention and criticism. [ 110 ]
Deirdre McCloskey has argued that many empirical economic studies are poorly reported, and while her critique has been well-received, she and Stephen Ziliak argue that practice has not improved. [ 111 ] This latter contention is controversial. [ 112 ]
A 2002 International Monetary Fund study looked at “consensus forecasts” (the forecasts of large groups of economists) that were made in advance of 60 different national recessions in the ’90s: in 97% of the cases the economists did not predict the contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated their severity. [ 113 ]Criticism of assumptions
Economics has been subject to criticism that it relies on unrealistic, unverifiable, or highly simplified assumptions, in some cases because these assumptions simplify the proofs of desired conclusions. Examples of such assumptions include perfect information. profit maximization and rational choices. [ 114 ] [ 115 ] The field of information economics includes both mathematical-economical research and also behavioral economics. akin to studies in behavioral psychology. [ 116 ]
Nevertheless, prominent mainstream economists such as Keynes [ 117 ] and Joskow have observed that much of economics is conceptual rather than quantitative, and difficult to model and formalize quantitatively. In a discussion on oligopoly research, Paul Joskow pointed out in 1975 that in practice, serious students of actual economies tended to use "informal models" based upon qualitative factors specific to particular industries. Joskow had a strong feeling that the important work in oligopoly was done through informal observations while formal models were "trotted out ex post ". He argued that formal models were largely not important in the empirical work, either, and that the fundamental factor behind the theory of the firm, behavior, was neglected. [ 118 ]
Despite these concerns, mainstream graduate programs have become increasingly technical and mathematical. [ 119 ] [ 120 ]See also
Economics — agflation Anglosphere attention economics bionomics brain waste brickor mortis BRICs caponomics … New words
Economics — E co*nom ics ([=e] k[o^]*n[o^]m [i^]ks), n. [Gr. ta o ikonomika. equiv. to h o ikonomi a. See
Economics — • The social science which treats of man s activities in providing the material means to satisfy his wants Catholic Encyclopedia. Kevin Knight. 2006 … Catholic encyclopedia
economics — index finance Burton s Legal Thesaurus. William C. Burton. 2006 … Law dictionary
Economics — [iːkə nɔmɪks], an amerikanischen Hochschulen gelehrte, der Volkswirtschaftslehre vergleichbare Disziplin; neben der Business Administration Hauptzweig der Wirtschaftswissenschaften in den USA … Universal-Lexikon
economics — 1580s, art of managing a household, perhaps from Fr. économique (see ECONOMIC (Cf. economic)); also see ICS (Cf. ics). Meaning science of wealth is from 1792 … Etymology dictionary
economics — ► PLURAL NOUN (often treated as sing. ) ▪ the branch of knowledge concerned with the production, consumption, and transfer of wealth … English terms dictionary
economics — [ek΄ə näm′iks, ē΄kənäm iks] n. 1. the science that deals with the production, distribution, and consumption of wealth, and with the various related problems of labor, finance, taxation, etc. 2. economic factors … English World dictionary
economics — /ek euh nom iks, ee keuh /, n. 1. (used with a sing. v.) the science that deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind. 2. (used with a pl. v.) financial considerations;… … Universalium
economics — The study of the economy. See also: macroeconomics; microeconomics; Keynesian economics, monetarism ( monetarist), and supply side economics. Bloomberg Financial Dictionary * * * economics ec‧o‧nom‧ics [ˌekəˈnɒmɪks, ˌiː ǁ ˈnɑː ] noun ECONOMICS … Financial and business terms