1. Lecture 2. Basic Microeconomics
Labor force – part of the population who are at least 15 years old, willing and able to work
Unemployment rate – the percentage of the labor force that is unemployed
Underemployment – part of the labor force who work for less than 40 hours per week
Visible underemployment – those people working for less than 40 hours per week and wanting
additional work
Invisible underemployment – those people working for 40 hours or more per week and still
wanting additional work
Frictional unemployment – unemployment that results because it takes time for workers to
search for the jobs that best suit their tastes and skills
Structural unemployment – unemployment that results because the number of jobs available in
some labor markets is insufficient to provide a job for everyone who wants one
Labor problems – conflicts on social reality with social ideals that normally rise out of
employment
Laissez-Faire Theory – states that individuals ought to be free to act in their own self- interest.
They must be allowed to move about without interference, choose their own business and
occupation, gain wealth, do whatever they like with their profits and property.
Market – a place where buyers and sellers interact and engage in exchange
ClassicalTheoryof Economics (mid 1700s and1800s)
The classical theory of economics, which dominated in the 18th and early 19th centuries,
laid the foundation for much of modern economics. Sometimes referred to as laissez faire
economics, classical theory emphasized growth, free trade, and competition, as free from
government regulation as possible. Under classical thought, when individuals pursue their own
interest, society as a whole benefits.
Under classical economics, the self-regulating market transforms a seemingly chaotic
process of buying and selling among consumers and producers into an orderly system of
transactions that meets individual needs and increases national wealth.
Under classical economics, the role of government is to provide national defense, a
system of justice that includes enforcement of contracts and a system of public works, including
infrastructure and education.
Smith, Adam, 1723–90, Scottish economist, educated at Glasgow and Oxford. He became
professor of moral philosophy at the Univ. of Glasgow in 1752, and while teaching there wrote
his Theory of Moral Sentiments (1759), which gave him the beginnings of an international
reputation. He is referred to as the “Father of Economics”. He travelled on the Continent from
1764 to 1766 as tutor to the duke of Buccleuch and while in France met some of the physiocrats
and began to write An Inquiry into the Nature and Causes of the Wealth of Nations, finally
published in 1776.
In that work, Smith postulated the theory of the division of labor and emphasized that
value arises from the labor expended in the process of production. He was led by the rationalist
current of the century, as well as by the more direct influence of Hume and others, to believe that
in a laissez-faire economy the impulse of self-interest would bring about the public welfare; at
the same time he was capable of appreciating that private groups such as manufacturers might at
times oppose the public interest. One of his major contributions was his analysis of the
relationship between consumers and producers through demand and supply, which ultimately
explained how the market works through the invisible hand.
'Labor Theory of Value '- an economic theory that stipulates that the value of a good or
service is dependent upon the labor used in its production. The theory was first proposed by
Adam Smith (1723-1790), the founder of modern economics, and was an important concept in
the philosophical ideals of Karl Marx. The labor theory of value suggests that goods which take
the same amount of time to produce should cost the same.
2. Malthus, Thomas Robert (February 13, 1766 – December 29, 1834) was a British
demographer and political economist, best known for his highly influential views on population
growth. Malthus is widely regarded as the founder of modern demography. He made the
prediction (Essay on Population, 1789) that population would outrun food supply, leading to a
decrease in food per person and so to widespread famine. He thus advocated sexual abstinence
and late marriages as methods of controlling the population growth.
The influence of Malthus' theories was substantial. His theory of demand-supply
mismatches, which he termed "gluts" was a precursor to later theories about the Great
Depression, and to the works of admirer and economist John Maynard Keynes. Malthus' idea of
humanity’s "Struggle for existence” also had a decisive influence on Charles Darwin and
evolutionary theory. Although Malthus opposed the use of contraception to limit population
growth, his work had a strong influence on Francis Place, whose Neo-Malthusian movement was
the first to advocate contraception. Concerns based on Malthus' theory also helped promote the
idea of a national population Census in the UK. His writings also were also influential in
bringing about the Poor Law Amendment Act of 1834.
Thomas Malthus is a key figure in demography; he thought that human population
increases much faster than agricultural production. Given this situation, something would have to
hold the population growth in check. He believed that there were two general kinds of checks
that limited population growth: preventive checks and positive checks. Preventive checks reduce
the birth rate, while positive checks increase the death rate.
Ricardo, David (1772–1823) British economist, of Dutch-Jewish parentage. At the age of 20
he entered business as a stockbroker and was so skillful in the management of his affairs that
within five years he had amassed a huge fortune. He then turned much of his attention to
scientific topics, and in 1799, after reading Adam Smith's The Wealth of Nations, began to study
political economy. However, 10 years elapsed before the appearance of his first writings on the
subject, a series of letters to the Morning Chronicle. A number of pamphlets and tracts followed,
in turn succeeded by Ricardo's major work, The Principles of Political Economy and Taxation
(1817). In that book he presented most of his important theories, especially those concerned with
the determination of wages and value. For the problem of wages he proposed the "iron law of
wages," according to which wages tend to stabilize around the subsistence level. Any rise in
wage rates above subsistence will cause the working population to increase to the point that
heightened competition among the glut of laborers will merely cause their wages to fall back to
the subsistence level.
Mill, John Stuart (1806–73) British philosopher and economist. A precocious child, he was
educated privately by his father, James Mill. In 1823, abandoning the study of law, he became a
clerk in the East India company, where he rose to become head of the examiner's office by the
time of the company's dissolution (1858). During this period he contributed to various
periodicals and met with discussion groups, one of which included Thomas Macaulay, to explore
the problems of political theory. His A System of Logic (1843) was followed in 1848 by the
Principles of Political Economy, which influenced English radical thought.
NeoclassicalEconomics (around 1870s)
Neoclassical Economics main concern was market system efficiencies. It brought
recognition to the economists Leon Walras, who introduced the general economic system, and
Alfred Marshall, who became the most influential economist during that time because of his
book Principles in Economics. Leon Walras developed the analysis of equilibrium in several
markets. On the other hand, Alfred Marshall developed the analysis of equilibrium of a particular
market and the concept of “marginalism”.
Keynes, John Maynard, Baron Keynes of Tilton (kānz), 1883–1946, English economist and
monetary expert, studied at Eton and Cambridge.
Keynes's departure from classical concepts of laissez-faire dated from the mid-1920s,
when he formulated the Liberal party's program to promote employment by a program of
government spending on public works. Keynes came to believe that such a program would
3. increase national purchasing power as well as foster employment in complementary industries.
For the sake of full employment Keynes also modified his classical belief in international free
trade. His ideas, based on large-scale government economic planning, are best expressed in his
chief work, The General Theory of Employment, Interest, and Money (1936). Coming at a time
when many nations had been racked by depressed economies, the book offered a sharp critique
of laissez-faire economic policies and argued that central government needed to step in,
particularly during periods of chronic unemployment. Other works by Keynes from this period
are the Tract on Monetary Reform (1923) and the Treatise on Money (1930).
'Keynesian Economics'
An economic theory stating that active government intervention in the marketplace and
monetary policy is the best method of ensuring economic growth and stability. A supporter of
Keynesian economics believes it is the government's job to smooth out the bumps in business
cycles. Intervention would come in the form of government spending and tax breaks in order to
stimulate the economy, and government spending cuts and tax hikes in good times, in order to
curb inflation. In Keynesian theory, government action is designed to stimulate the market, not to
eliminate it.
