Economic Schools of Thought

Your own Analysis according to the note and the video?

Last week's lesson notes gave you a "little taste" of the theories that have contributed to the study of economics; in future lessons we'll study Keynesian, Monetary and Supply Side theories as well. However, I came across this YOUTUBE stream that I thought-though a bit early on in the class- might answer some "curiosities" you might have just now. It provides an overview of various "Economic Schools of Thought" pertaining to Macroeconomics.

So I'd like you to watch the link below, it's only a little over 10 minutes long and not as boring as my lesson notes

(39) Economic Schools of Thought: Crash Course Economics #14 - YouTube

The Laws of Demand and Supply, or "how markets function and why YOU should know this for a better life," if I may sound so pontifical...

During our last lesson we discussed the evolution of economics, highlighting the more significant ideologies pervasive over time. Additionally, we were introduced to Adam Smith and John Maynard Keynes, two of the most renown economists, whose influences still have profound implications on economic thought in both domestic and global arenas. In this lesson we seek to understand the fundamental principles of Supply and Demand. At the end of our discussion you will have yet another homework assignment encompassing what we have analyzed. The lesson... We have defined the terms "Macroeconomics," "Scarcity" and several economic practices prevalent in Western thought. Now let us discuss certain "laws" in economics.

The Law of Demand: at higher (lower) prices the quantity demanded is lower (higher). In other words, if the price of a good or service we wanted to buy -such as a brand new SUV- was lowered by from $30,000 per vehicle to $28,000, in the AGGREGATE sense you would have more units sold because of the cheaper price; more consumers can buy at 28 than at 30. Conversely, if we raised the price from 28,000 to 30,000 fewer SUV's would leave the lot! You see, the quantity demanded per unit is effected by a change in the price. Remember back in "Lesson One" we talked about price acting as an "allocation" method of scarce resources? Well, everybody (in our hypothetical example) would want a new SUV.

But not everyone can afford them. Dealers won't just give them away, so you need to have something (a pricing system based on money) that can allot a scarce resource (in this case the SUV) among those who can afford such items while simultaneously telling those who can't afford the scarce resource to "take a hike." If we constructed an imaginary, downward sloping line we, in essence, will construct a demand curve. Movement along this curve, BASED ON CHANGES IN PRICE, IS CONSIDERED A CHANGE IN QUANTITY DEMANDED. REMEMBER THIS. DEMAND CURVE!! As prices decline (increase) the quantity demanded increases (decreases)

The Law of Supply Now...this is really interesting...the law says: At higher (lower) prices the quantity supplied of any good or service is (less) more. Sounds a bit strange, but look at it this way... ...Producers will go into business to do one thing and one thing only: MAKE MONEY...the "name of the game" IF THOSE WHO ARE MANUFACTURING SUV'S REALIZE THEY CAN MAKE MORE MONEY IF THEY PRODUCE ONE MORE SUV (UNIT) GUESS WHAT? PRODUCERS WILL SUPPLY MORE IF THEY CAN GET MORE MONEY? THE SLOPE OF THE SUPPLY CURVE IS UPWARD...THE HIGHER THE PRICE, THE GREATER THE QUANTITY SUPPLIED. ...If YOU decide to provide bookkeeping services at $40 per hour you might want to offer 3 hours per day (in addition to taking this wonderful class ?) given your busy schedule.

Now if you find out that other students providing the same service CAN, AND ARE, getting $60 per hour with 5 hours of work, you might say "I think I might take Vasconcellos' class at a later date and devote two more hours per day to my enterprise." In essence, you've decided to work more (produce more) because you can make, that's right- more money! Aggregate Supply Curve The text most likely refers to several effects causing the UPWARD SLOPE of the Supply Curve, but the principles are similar to our example in the previous paragraph.

As mentioned, the slope is UPWARD because at higher prices the quantity supplied is more...movement along this curve is a change in quantity supplied...remember this The two "effects" causing the slope of the Aggregate Supply curve are Profit and Cost. ~ Profit: As mentioned, more money is an inducement to produce more, more, more. This is the profit effect and again, it adds to the positive slope of the curve. ~ Cost: Keep in mind "aggregate" means in "total"

Some Macro texts will indicate that the supply curve has a very, very, steep upward slope in its later stages...The explanation is simple: with more competition for the good provided, those selling "the product" must raise prices because it's costing them more (due to competition from other suppliers who came into the "market" to supply this good in hopes of making money...) to sell consumer goods. Thus, the curve has a VERY STEEP SLOPE in the later stages reflecting higher costs which must be passed on in the form of higher prices. As to the "why" of a flat, intermediate, and "steep" Supply Curve, when we discuss Keynes in more detail you'll get the picture.

Now back to you...

...You've been selling your bookkeeping services and making tons of MOOLAH!!! So much in fact that the local Staples and Office Max stores have to raise prices because you (and those whom you attracted to this enterprise) are buying supplies constantly. Yep, you did it! By becoming so profitable other entrants (suppliers) came in and now they're competing with you! That's right...they're buying from Staples, thus putting a run on Staples' inventory. So what does Staples do? Raise prices for merchandise....what will you do if you want to stay in business? Raise your prices for your services. Hey! You guys catch on pretty quick! ?

Theoretically, your "supply curve" is quite steep...and you caused it! Shame on you!!! Listen, you've got to have fun with this stuff. If not, it gets pretty boring really QUICK!!! Now I want you do the following on a piece of paper:

1. Draw a giant "X." The "part" sloping from left to right is the demand curve; the other is the supply curve. 2. Label the intersection of "X" as the price.

"What am I doing now?" you ask...I'll tell you!

MARKETS must have a clearing price and the intersection of the Supply and Demand is that price. Clearing Prices mean that just enough supply will cover the amount of demand in the market. If the quantity supplied is greater than the intersection point, you have a "Surplus"; if the quantity supplied is less than the intersection point you have a shortage. (another important concept you must learn...sorry!)

Take a deep breath; I realize its getting tricky but the book will help as well.

Back to the "X"; let's now analyze the downward slope of the demand curve. IF YOU WERE TO MAKE A "PIN PRICK" ON THE LINE (DEMAND CURVE) ABOVE THE INTERSECTION POINT, THIS IS A PRICE HIGHER THAN WHAT CONSUMERS ARE WILLING TO PAY IN COMPARISON TO THE INTERSECTION. Stay with me...CORRESPONDINGLY AT THIS SAME "PIN PRICK" ON THE SUPPLY CURVE, THE QUANTITY SUPPLIED IS GREATER THAN THE INTERSECTION...

Very simple...at a higher price the quantity supplied is more; the quantity demanded is less BUTTTTTTT the market IS NOT IN EQUILIBRIUM (at the intersection) It's like saying "I'll charge $80 for bookkeeping, but I can only get 5 customers; maybe if I lower my price back down to $60 I'll get a few more..."

Ok, class....let's stop here and digest this a bit...markets are most efficient when they provide goods and services at the lowest possible costs for the most consumers. Businesses must earn a profit-no argument here- but not at the expense of the consumer-POLAR OPPOSITE TO THE 18TH CENTURY MERCANTILISTIC PHILOSOPHY ADAM SMITH CRITIQUED!!!