Classical Economics and Its Assumptions Flashcards
What is Classical Economics?
Classical Economics is a school of thought emphasizing free markets, competition, and minimal government intervention.
Name key figures in Classical Economics.
Adam Smith, David Ricardo, and John Stuart Mill.
What is Say’s Law?
“Supply creates its own demand,” meaning production inherently generates the demand needed to purchase goods.
Explain the Saving-Investment Equality assumption.
Savings automatically equal investments through flexible interest rates.
What does the assumption of flexible prices mean?
Prices and wages adjust freely to changes in supply and demand, ensuring market equilibrium.
Highlight one major principle of Classical Economics.
The idea of self-regulating markets, where competition ensures efficiency and growth.
What is the Classical Economic Model based on?
The model is based on assumptions like full employment, rational behavior, and flexible prices.
How does the Classical model view government intervention?
It advocates minimal government intervention, believing markets are self-correcting.
What are the mechanisms of the Classical model?
Flexible wages and prices, Say’s Law, and the invisible hand driving market equilibrium.
How did Keynes criticize Classical assumptions?
Keynes argued that markets don’t always self-correct, citing sticky wages, savings imbalances, and inadequate demand.