economic methodology and history

Question 1

who was Adam Smith?

Answer 1

• known as founding father of economics
• beliefs part of classical economics
• advocator of free market- believed that individuals pursuing self- interest would be guided by an ‘invisible hand’ to help the rest of the population- laissez-faire
• wrote the wealth of nations

Question 2

who was David Ricardo?

Answer 2

• follower of classical economics
• believed in Adam Smiths ideas
• also believed in comparative advantage- all countries should pursue products with little opportunity cost to trade- all better off rather than by searching for absolute advantage

Question 3

Karl Marx

Answer 3

• critic of capitalism- believed it was unsustainable despite driving innovation
• believed widening gap between employers and working class would cause revolution where the structure would be upturned
• wrote the communist manifesto in 1848
• Labour Theory of Value- value of a good= amount of labour used in production

Question 4

John Keynes?

Answer 4

• government should interfere with economy when in a downturn
• use of fiscal policy to supplement losses from unemployment and kickstart economy
• new branch of economics Keynesian became most popular from 1930s on
• wages are sticky without gov intervention- don’t change at same rate as supply and demand.

Question 5

Friedrick Hayek?

Answer 5

• followed austrian school of economics
• capitalism drives innovation and creativity
• said that price expectation allows consumers to make economic plans.

Question 6

Milton Friedman?

Answer 6

-opposed Keynesian economics
- believed monetary should be used instead of fiscal policy by gov as it would lead to long term growth rather that short term.
- Theory of Consumption Function- consumers economic decision based on expectation of future income
- Advocate of free market and deregulation
- Theorised possibility of stagflation.

Question 7

what is positive economics?

Answer 7

statements that can be tested, accepted, refuted, or amended based on evidence- factual, rely on scientific method

Question 8

what is normative economics?

Answer 8

subjective judgements that cannot be proven

Question 9

What is the Labour Theory of Value?

Answer 9

• Value of a good= amount of labour used in production

Question 10

Richard Thaler?

Answer 10

behavioural economics- study of why individuals make economic decisions through psycological experimentation- humans not always rational, which is assumed by classical economics

Question 11

what assumptions are made by classical economics?

Answer 11

• firms aim to maximise profits
• consumers aim to maximise utility

Question 12

what is utility, marginal utility, total utility, deminishing marginal utility?

Answer 12

the satisfaction a consumer derives from consuming goods/services

the satisfaction a consumer gains from consuming one (more) unit of a good/service

The total satisfaction a consumer gains from consuming successive units of a good/service

The utility gained from consuming a product decreases with each extra unit consumed.

Question 13

what is Say’s Law?

Answer 13

Supply creates its own demand, therefore free market economies tend towards full employment without gov. intervention