The Nature and Scope of Economics

Economics is defined as the social science that deals with the production, distribution, and consumption of goods and services. Evolved in the 19th century, the economic studies have become one of the most significant studies of modern days. From a small shop to a country, Economics plays a crucial role in the efficient running of both.

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What are Economic Theories?

Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve the economic phenomena. They are comprehensive system of assumptions, hypotheses, definitions and instructions what should be done in a certain economic situation. In principle, the approach to economic theory is divided into positive and normative.

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Ability-to-pay principle

Taxation should be levied according to an individual’s ability to pay; that is, the more prosperous will meet a proportionately higher percentage of the national tax demand. In other words, individuals who earn more income pay more tax, not because they use more government goods and services but because taxpayers who earn more have the

Absolute advantage theory

Absolute advantage theory of Scottish economist Adam Smith (1723-1790) was an international trade history theory that asserted individuals or nations trade because they have superior productivity in particular industries. Nations should produce and export goods for which they possess an absolute advantage and import others which other nations possess an absolute advantage for. Governments may

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Absolute income hypothesis (1936)

Proposed by English economist John Maynard Keynes (1883-1946) as part of his work on the relationship between income and consumption, absolute income hypothesis was much refined during the 1960s and 1970s, notably by American economist James Tobin (1918-2002). Keynes’ General Theory in 1936 identified the relationship between income and consumption as a key macroeconomic relationship. Keynes asserted that real consumption (ie adjusted for inflation) is

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Acceleration principle (1917)

Formulated by American economist John Maurice Clark (1884-1963), acceleration principle is one of the basic pillars of modern macroeconomic theory and is an important tool in understanding the development of business cycles. The acceleration principle links investment to output, each level of which needs a specific amount of capital. If output (and the amount of

Adding-up problem (1894)

Identified by English economist Philip Wicksteed (1844-1927) among others, adding-up problem refers to the difficulty of ensuring that the income earned by different factors of production when added together equals national income. If each factor of production is paid the value of its respective marginal product, cetris paribus, a situation will eventually arise in which total product (total

Adaptive expectations principle (1911)

Originally used by American economist Irving Fisher (1867-1947), adaptive expectations principle was popularized and given its current name during the 1950s in the study of hyper-inflation. Adaptive expectations principle posits that future values may be calculated on the basis of previous values and their margin of error. For example, next year’s inflation rate can be estimated by

Administered pricing (1930)

Sometimes known as inflexible pricing, administered pricing refers to the setting of prices by individual or public bodies rather than by the interaction of market forces of demand and supply. In general, prices are set by adding a profit margin to the average cost. Seen in the pricing policies of monopolies, cartels, oligopolies or government

Adverse selection (1970)

American economist George Arthur Akerlof (1940- ) first noted adverse selection problem (sometimes referred to as the lemon problem), which arises from the inability of traders/buyers to differentiate between the quality of certain products. The most cited example is the second hand car industry, in which a trader dealing in, for example, Minis possesses product information that

Agency Theory

Agency theory is a principle that is used to explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents. An agency, in broad terms, is any relationship between two parties in which one, the agent, represents the

Aggregate demand theory (20TH CENTURY)

Championed by English economist John Maynard Keynes (1883-1946), aggregate demand theory asserts that the total demand within an economy helps to determine the level of output and growth. If demand and consumption are lowered (for example, through wage cuts), overall economic activity will be reduced. What Is Aggregate Demand? Aggregate demand is an economic measurement of the

Allais paradox (1952)

Allais Paradox was formulated by French economist Maurice Allais (1911- ) to counter principles of game theory proprounded by other economists and to establish a definition of rationality in risky situations. Earlier analysis of game theory had suggested that in the following example, the preference of A over B should entail a preference of C

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Anarcho-syndicalism (20TH CENTURY)

Anarcho-syndicalism is a political philosophy and anarchist school of thought that views revolutionary industrial unionism or syndicalism as a method for workers in capitalist society to gain control of an economy and thus control influence in broader society. Syndicalists consider their economic theories a strategy for facilitating worker self-activity and as an alternative co-operative economic

Ansoff Matrix: four growth strategies and practical examples

The Ansoff matrix or Market Product development matrix, or market product matrix was developed by a famous researcher – Igor Ansoff in 1975. Until now, The Ansoff matrix has been used as a strategic planning tool for revenue growth at firms’ different market segments; thereby facilitating strategic managers in making decisions. Four growth strategies from

Arbitrage pricing policy

Arbitrage pricing policy refers to the practice of simultaneously buying an asset (currency or commodity) while trading in a low-price market, and selling it in a higher price market with the intention of making a profit from the transaction. It is argued that the effect of the arbitrageur’s action is eventually to eliminate any existing

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Arrow-Debreu Model (1954)

Named after American economist Kenneth Arrow (1921- ) and French-born economist Gerard Debreu (1921- ), who examined the dynamics of the whole economic system and were able to prove the existence of a multimarket equilibrium in which no excess demand or supply exists. In mathematical economics, the Arrow–Debreu model suggests that under certain economic assumptions

Asymmetrical information

Asymmetrical information exists when one side of the market possesses information lacked by others in that market. Employers in labor markets often posses more information about the current/future status of their industry than trade unions or workers, and can use this as a basis of negotiation. However, it can be seen as an imperfection in

Average cost pricing (1939)

Research by ROBERT ERNEST HALL (1943- ) and CHARLES J. HITCH showed that, whilst prices represent the average cost of production and distribution, firms typically set their pricing policies by determining the average cost of production, and adding a profit margin which does not appear to vary with market demand. The average hourly wage in

Balanced budget multiplier (1940S)

Axiomatic theories relating to consumer behavior and rationality, and are an essential part of consumer demand theory and indifference curve analysis. A balanced budget (equilibrium)(particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts “balance”). More generally, it is a budget that has no budget deficit, but