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Laissez-faire No justification for government intervention except for defence/justice Pursuit of self-interest Benefited individual therefore society Invisible hand of competition Division of Labour Splitting of tasks among workers to make them more productive. Eg. it takes 18 different operations to make a pin! Cannons of Taxation Labour theory of value & wealth The value of an item is equal to the amount of labour that goes into producing it Fair Tax System equity economy certainty convenience www.pdst.ie/sc/economics An economy will work well if the government leaves people alone to buy and sell freely among themselves because an unobservable market force helps the demand and supply of goods in a free market to reach equilibrium automatically Free Trade With no tariffs/tax, markets operate effectively & trade to be spread between nations Laissez-faire Pursuit of self-interest Invisible hand of competition Division of Labour Cannons of Taxation Labour theory of value & wealth Free Trade www.pdst.ie/sc/economics Applied the Law of Diminishing Returns to Land • Best land taken up first, then next best, then inferior land • At each stage the amount of food produced is less than before Theory of Population & Food • Population grows geometrically (2, 4, 8, 16, 32) • Food grows arithmetically (1, 2, 3, 4, 5, 6) • If population not kept in check famine & disease would result • SOL did not fall in 19th century but his ideas were more relevant in the population explosion of the 20th century Iron Law of Wages An increase in wage above subsistence level = increase in population = increase in supply of labour = decrease in wage www.pdst.ie/sc/economics Applied the Law of Diminishing Returns to Land Theory of Population & Food Iron Law of Wages www.pdst.ie/sc/economics Applied the Law of Diminishing Returns to Land Economic Rent • If population increases inferior land used • For use of land rent was paid • Cost of producing on the best land was lower • Food produced on good land earned a surplus over that produced on inferior land • This surplus led to an increased rent payable for the use of good land • Supported idea of free trade • A country should specialise in the production of those goods in which it is relatively most efficient • And trade for the remainder of its reqiuirements Accepted the Subsistence Wage Theory He agreed that an increase in wage above subsistence level = increase in population = decrease in wage www.pdst.ie/sc/economics Applied the Law of Diminishing Returns to Land Economic Rent Accepted the Subsistence Wage Theory www.pdst.ie/sc/economics Predicted Growth of oligopolies Forecasted Emergence of trade cycles Labour Theory People required to work more hours than necessary to generate the income needed to pay their wages Social Revolution Where proletariat would take public ownership of the Factors of Production Profit Profits invested in technology Labour produces a surplus value which was profit for employers Reduced need for labour = unemployment www.pdst.ie/sc/economics Two tiered society = unequal distribution of wealth Capitalists (owners) Proletariat (workers) Labour Theory Social Revolution Profit Profits invested in technology Two tiered society = unequal distribution of wealth ) www.pdst.ie/sc/economics Quasi Rent Theory of Value Economic rent earned by FOP in SR when D>S The value of an item is determined in • SR by utility and demand • LR by cost of production Consumer Surplus Growth of monopolies could be prevented by The difference between what a consumer actually pays for a good and the maximum which he/she would have been willing to pay rather than going without it • Government regulation • Consumer information • More accountability Distribution of income/wealth Price-elasticity of demand The return to each FOP is determined by their marginal utility Quantified buyers’ sensitivity to price changes www.pdst.ie/sc/economics Quasi Rent Theory of Value Consumer Surplus Growth of monopolies could be prevented by Distribution of income/wealth Price-elasticity of demand www.pdst.ie/sc/economics Favored government intervention • It is the job of the government to run the economy • Government can use fiscal policy (any action Liquidity Preference Theory taken by the government which alters current revenue & expenditure) to create full employment • Eg. Decrease VAT to boost spending or increase government spending to increase demand and create jobs If Inv<Saving = Leakage Leads to a decrease in national income & employment The Multiplier Shows the relationship between an initial injection into the circular flow of income and the eventual total increase in national income 3 reasons (motives) for holding wealth in the money form The Paradox of Thrift Saving too much leads to reduced aggregate demand www.pdst.ie/sc/economics • Transaction motive • Precautionary • Speculative (See chapter on capital) Investment decisions Depends on expectations not rate of interest Favored government intervention Liquidity Preference Theory If Inv<Saving = Leakage The Paradox of Thrift The Multiplier Investment decisions www.pdst.ie/sc/economics Monetary policy Laissez-faire Should be the main instrument used by the government to manage the economy. (Actions taken by the government/ECB which influences the money supply, interest rates and availability of credit). • Minimum state intervention • De-regulation of markets • Privatisation Supply side policies Improve market efficiency, boost supply, reduce the power of trade unions. Reduction in inflation Leads to increases competitiveness, cheaper exports and job creation in the long run. Firms keep wage increases to a minimum to avoid cost-push inflation. Control of money supply • Control inflation by strict control of money supply • Restrict loans and increase interest rates www.pdst.ie/sc/economics Monetary policy Laissez-faire Supply side policies Reduction in inflation Control of money supply www.pdst.ie/sc/economics