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Quick Econ Overview
By Shalin Hai-Jew
Learning Resource: Basic assumptions of a laissez faire (pure capitalism)
market economy:
Human Desires and Behavior: Human wants and needs are infinite and
insatiable (people are never satisfied), but goods and services are limited resources.
Economics helps society find the best allocations of labor and resources to balance these
two fundamental truths. Economics assumes “rational self-interest” in people’s
behaviors. This assumes that people do whatever will achieve their “greatest
satisfaction”.
Economic Goals: The goals of a balanced and healthy economy are as follows:
economic growth, full employment, economic efficiency, price-level stability, economic
freedom (and free will), equitable distribution of income, economic security, and balance
of trade (with the rest of the world). The assumption is that an economy is dynamic and
cyclical; it is ever-changing and will swing from health to lack of health. No Humanity
or Emotions: The economy is a market system. It is not a value system, and it simply
just runs. There may be human costs and disruptions, but people need to be flexible in
order to survive in a laissez faire economy.
Positive and Normative Economics: Positive economics focuses on facts and
cause and effect relationships. Normative economics applies value judgments about what
is important socially and is applied to an economic policy to try to make positive change.
Inputs to an Economy/Factors of Production: Land, labor, capital and
entrepreneurial ability are the “factors of production.” These elements combine in an
economic system to benefit the whole. Efficiency is defined in two ways. Productive
efficiency is the “particular mix of goods and services in the least costly way.”
Allocative efficiency is the “particular mix of goods and services most wanted by
society.”
Future or Present Focused Spending: Future-focused spending would be
capital investments (education, technological development, research and development,
equipment, facilities, etc.) Present-focused spending would be on consumables that do
not have long-lasting value and are merely for present pleasures or needs.
Economy or Citizenry Decision-making: The laissez faire economic system
assumes that the marketplace makes the main political decisions in terms of monetary,
fiscal, taxation and other policies (current Republican point of view). The current
Democratic stance suggests that the citizenry and government officials should have a
greater say on government policies.
Individual Role: Each societal member (who is not a student, not retired, not
disabled and not institutionalized) has a role in working in a laissez faire economy. (This
is about half of the U.S. population that makes up those eligible to work.) Whatever is
earned by the individual is either saved or spent. (Around –4 to 2% of American wages
are saved as a national average. The rest is spent on a standard of living and
consumables.)
Production Concepts: Producers will continue to produce a good so long as
their fixed and variable costs do not outweigh their returns. With the law of diminishing
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returns, though, there’s only a limited amount of production that can be done before
losses will start to set in. However, that period of equilibrium of production may be
maintained for a long period of time. Determinants of Supply: These factors affect the
supplies in the marketplace: resource (raw) prices, technology, taxes and subsidies,
prices of other goods, price expectations, and number of sellers in the market.
Consumer Concepts: Consumers experience the law of diminishing marginal
returns, which suggests that as consumers buy more of the same product, the “utils”
(units of personal satisfaction) gained from each additional item diminishes.
International Trade: All nations participate in international trade, one way or
another. (97) Allowing nations to specialize based on their resources and human capital
enhances international trade and benefits all. This allows each nation to compete based
on its comparative advantage. “A nation has a comparative advantage in some product
when it can produce that product at a lower domestic opportunity cost than can a
potential trading partner.”
Token Money: The U.S. has “token” money that is not backed up by gold or
silver but rather only the Federal Reserve and other government entities which regulate
the value of the money supply. Paper money constitutes 46% of the U.S. economy’s
money supply Money is a “medium of exchange,” a “unit of account”, and “store of
value.” Approximately 52% of the American money supply is in checkable deposits at
the bank (both savings and money loaned by the banks). Near-monies are savings
accounts, money market deposit accounts, time deposits (CDs), and money market
mutual funds. Money is demanded to make purchases and to hold value as an asset.
References
McConnell, C.R. and Brue, S.L. (2002).. Economics: Principles, Problems, and
Policies. 15th Edition. Boston: McGraw-Hill Irwin.
Weimer, D.L. and Vining, A.R. (1989, 1992, 1999). Policy Analysis Concepts
and Practice. Third Edition. Upper Saddle River: Prentice-Hall, Inc. p. 59.