History of Economic Thought Lecture 2 Flashcards
Who came up with Relative Price Theory?
David Ricardo
What determines prices according to David Ricardo’s Relative Price Theory?
- More inputs in production than just labour
2. Production process of unequal length of time
What kind of implications David Ricardo meets in his relative Price Theory?
- Deviation in relative price not more than 6-7%
2. Level of wages is not irrelevant for relative prices
Who came up with Theory of Rent and elaborated on this topic after Adam Smith?
David Ricardo
According to David Ricardo should rent be a part of the price formation?
NO
What is the main difference in David Ricardo’s and Adam Smith’s Theory of International Trade?
Adam Smith - trade based on absolute cost advantage
David Ricardo - each country specializes in production and exports part of it (comparative advantage)
David Ricardo was ___ Corn Laws
Against
Why there is tension between David Ricardo’s Labor Theory of Value and Theory of Comparative Advantage?
There is no mention of how gains from trade are split
David Ricardo’s Theory of Market Gluts:
Temporary glut can occur;
Supply creates its own demand by recourse allocation between production process of various commodities and capitalists’ savings imply investment expenditures which create demand for good
What is David Ricardo’s view on Economic Policy?
- Abolish Corn Laws
- Population growth should not come at cost of economic growth
- International trade and its associated gains should not be restricted
Who was the last economist of Classical School and in transition to Neo-classical one?
John Stuart Mill
Adam Smith’s and David Ricardo’s Theory of Price was driven by
Supply side of the Economy (price determined by production costs)
Who introduced the demand side of the economy to the Theory of Value aka Price Theory?
John Stuart Mill
3 major inovations of John Stuart Mill to the Theory of Value:
- prices adjust to the level where the value of exports equals the value of imports
- prices adjust to the level where supply = demand
- general equilibrium concept: aggregate demand = aggregate supply
According to John Stuart Mill, what is a fundamental principle of price formation?
Is tendency of market mechanism to equate supply and demand
John Stuart Mill’s opinion on the Theory of Wage funds:
He rejected the theory as trade unions are unable to influence wages (actually there is evidence that they could)
To whom belongs the Theory of History?
Karl Marx
What are the forces of production in Karl Marx’s Theory of History?
Technology, types of capital, skill level of labour
What are the relations of production in Karl Marx’s Theory of History?
Rules, social relations, property relations
What are the superstructure reinforces o in Karl Marx’s Theory of History?
Art, philosophy, religion, literature, etc
Karl Marx’s Labor Theory of Value:
Absolute labor time determines value and capital and landowners do not any value (only one productive factor, similar to physiocrats’ nature for agriculture)
Karl Marx did not agree with Adam Smith on
Invisible hand, as capitalists profits are used to accumulate profit (wages were little -> able to make profit from the production)
What are the 4 main principles of Karl Marx?
- Reject classical harmony of interest
- Oppose to laisser-faire
- Reject Say’s Law
- Protect collective action and public ownership of enterprise
Who was the first to note the phenomenon of business cycles?
Karl Marx
What did Karl Marx accurately predict?
Growth of large-scale enterprises and monopoly power
What are 6 characteristics of Marginal School?
- Stronger emphasis on behaviour of individual agent
- Increased focus on demand
- Mathematics in economics
- Rational behaviour
- Equilibrium approach
- Limited role for government
`Who were 3 forerunners of Marginalists School?
- Antoine Augustin Cournot
- Jules Dupuit
- Johann von Thünen
Who first applied mathematics to economic analysis?
Antoine Augustin Cournot
What major theories did Antoine Augustin Cournot came up with?
Theory of price formation in the market with one or few suppliers -> Theory of Monopoly and Theory of Duopoly
What is the main idea of Jules Depuit?
Marginal Utility Curve: additional utility from unit of good depends on the amount of the good you already have
What is Johann van Thünen’s main idea?
Theory of Location:
- positive and diminishing marginal productivity of labour
- use labour up MP=MC (optimality)
- transportation costs
Who were Marginalists?
- William Stanley Jevons
- Carl Menger
- Leon Walras
Who was the first “real” economist we have discussed?
William Stanley Jevons
Who came up with Theory of Utility?
William Stanley Jevons
William Stanley Jevon’s Theory of Utility:
- marginal VS total utility
- rational choice -> equimarginal rule MU=MC (in international trade & decision to work as well)
- Law of decreasing marginal utility
- Prices are determined by marginal utility, as the total vs marginal utility solves water-dimond paradox
- No general equilibrium model
What is Carl Menger’s Theory of Value?
It is based on utility concepts, BUT prices are based on total utility, price of production factors imputed from consumer goods
Who came up with Mathematical General Equilibrium Model?
Leon Walras
According to Leon Walras how were relative prices determined?
1 numeraire & m-1 relative prices;
Optimization of utility: marginal utility divided by the price must be the same for all goods, hence, prices are determined first
Leon Walras’ General Equilibrium:
- Consumers max utility, producers max profits
- Consumer’s demand = firm’s supply
- firm’s demand = consumer’s supply for all factors of production
What did marginalists bring?
New approach to economic theory due to focus on demand, marginal utility theory, mathematical methods
What contributions of Marginalists can be found in modern economics?
Monopoly model Duopoly model Theory of diminishing marginal returns Theory of rational consumer choice Law of demand Law of diminishing marginal return Returns to scale concept
How Leon Walras extended his model of Mathematical General Equilibrium?
He added conditions for cost minimization (free competition brings production costs to minimum)
