Fundamental Concepts

Definition/Divisions and History of Economics Economics is the proper allocation and efficient use of available resources for the maximum satisfaction of human wants. Since resources are generally scarce while human wants tend to be unlimited, economics encounters not a few problems. However, the biggest problem is not limited resources like land, money, machines, raw materials, technology, skilled workers or competent managers. The root problem, which is the real problem, is the unjust distribution of productive resources among the members of the society. Such misdistribution of wealth and income is the root cause of poverty. Our available resources are in the hands of very few families. So, most of the people are mere tenants, clerks, factory workers and servants. The fundamental problem of unfair allocation of resources has been a global problem. Most of the counties of the world experience such problem. There are extremely very few rich while there are many poor. These countries are located in Africa, Asia and Latin America. These regions are the poorest in the world. Everyday, some 40, 000 countries spend billions and billions of dollars for the foods of their favorite dogs and for arms race. Indeed, it is a very sad comparative note in illustrating the unjust distribution of resources. But this is what really happens in our world. Divisions of Economics 1. Microeconomics- deals with the economic behavior of individual units such as the consumers, firms and the owners of the factors of production. Such specific economic units constitute a very small segment of the whole economy. their activities are presented and discussed in details. For example, the price of rice, the number of workers of san Miguel Corporation, the income of Mr. Cruz, the expenditures of MERALCO, etc. 2. Macroeconomics- deals with the economic behavior of the whole economy or its aggregates such as government, business and household. An aggregate is composed of individual uinits. The operation of the various aggregates and their interrelationships are analyzed to provide a profile of the economy as a whole. Macroeconomics is concerned with the discussion of topics like gross national product, level of employment, national income, general level of prices, total expenditures, etc. When we study the income or family savings bank, we are dealing with microeconomics; but when we deal with the total income or total expenditure of the whole banking industry, then we are involved in the study of macroeconomics. If we discuss the economic crisis of our country, we are concerned with macroeconomic analysis. However, what is true in microeconomics may not be true in macroeconomics. For example, a vegetable farmer gets better harvest. This means more income for him. But if all vegetable farmers have increased their harvests, it is no longer favorable for them. More supply reduces the price of vegetables.

History of Economics Economics as a science is very young compared with other sciences, which were formed even hundred years before the Birth of Christ. It has started to be known when Adam Smiths book Wealth of Nations was published in 1776. This book became the bible of economics for more than a century. Because of the economic contributions of Smith in the field of science, he has been considered the Father of Economics. However, the ideas and practices of economics have been as old as mankind. These economic thoughts appeared in biblical teachings, philosophy and politics. The primitive people were resourceful. They invented ways and means of food gathering and hunting. Such art of making a living among the ancient tribes represented a form of economics. During the biblical times, economic ideas and activities were influenced by biblical teachings and the wisdom of the great prophets. Even the Babylonian code of Hammurabi contains detailed regulations for economic practices. Justice, charity and honesty were the rules in economic dealings. Usury was prohibited. Profits were despised. The Babylonians had clear ideas about interests and mortgages. The Phoenicians had good knowledge about commerce and money. The Hebrews and the Hindus stressed the virtues of industry, temperance, and economy. The word economics was derived from an ancient Greek work oikonomos, which means household management. The housekeeper had to see to it that there was enough food, clothing and shelter; that the house was kept in order; that the necessary duties and responsibilities were performed by the members of the household; and that their products were distributed according to necessity or custom. To the ancient Greeks, however, the term oikonomos applied more on the proper management of city-states. Basic Economic Problems The Three Basic Economic Problems are: 1. What goods and services to produce and how much. In business, a feasibility study determines whether certain goods or services become profitable or not in a given market. Investors are only willing to produce goods and services, which give them good profit. Apparently, there is no problem. Just simply conduct a market study or feasibility study. In reality, however, it is not always possible to produce all the goods and services that people need, because resources are limited. 2. How to produce the goods and services. This is problem of production technology or methods of production. As a general rule, goods and services must be produced in the most efficient manner. This means maximum output with minimum input without sacrificing quality. Although the rich countries use advanced technology in the production of goods and services, there are still

goods and services which could not be produced efficiently; hence, the continuous research and development projects. The application of modern technology has increased output and decreased cost of production. Such production efficiency has greatly contributed to the high standard of living of the industrial countries. 3. For whom are the goods and services. This is a problem of distri-Bution. Who gets the goods like rice, clothes, shoes and the services such as education, medicare, etc. in a pure market economy or capitalism, goods and services are definitely for those who have money and are willing to purchase them. Economic system models Economic Systems An economic system is asset of economic institutions that dominates a given economy. An institution is a set of rules of conduct, established ways of thinking, or ways of doing things. Examples are taxation; profit motive, economic planning, production or banking. The principle objective of an economic system is to solve the basic economic problems. Economic system models 1. Capitalism the factors of production and distribution are owned and managed by private individuals or corporations. It has been known by similar terms like market economy, free enterprise economy, or laissez faire economy. The latter are French words which mean no government intervention in economic affairs. The essential characteristics of capitalism are:
y y y y

Private property Economic freedom Free competition Profit motive

As a way of thinking, capitalism involves the following: Capitalism as a way of thinking is fundamentally individualistic, that is, that the individual is the center of capitalist endeavor. This idea draws on all the Enlightenment concepts of individuality: that all individuals are different, that society is composed of individuals who pursue their own interests, that individuals should be free to pursue their own interests (this, in capitalism, is called "economic freedom"), and that, in a democratic sense, individuals pursuing their own interests will guarantee the interests of society as a whole. Capitalism as a way of thinking is fundamentally based on the Enlightenment idea of progress; the large-scale social goal of unregulated capitalism is to produce wealth, that is, to make the national economy wealthier and more affluent than it normally would be. Therefore, in a concept derived whole-cloth from the idea of progress, the entire structure of capitalism as a way of thinking is built on the idea of "economic growth."

This economic growth has no prescribed end; the purpose is for nations to grow steadily wealthier. Economics, the analysis of the production and distribution of goods, has to be abstracted out of other areas of knowledge. In other words, capitalism as a way of thinking divorces the production and distribution of goods from other concerns, such as politics, religion, ethics, etc., and treats production and distribution as independent human endeavors. In this view, the fundamental purpose and meaning of human life is productive labor. Marxism, which has more in common with capitalism than it has differences, also bases itself on these ideas. The economic world view treats the economy as if it were mechanical, that is, subject to certain predictable laws. This means that economic behavior can be rationally calculated , and these rational calculations are always future-directed . So, the mechanistic view of the economy leads to an exclusively teleological world picture; capitalism as a manipulation of the "machine" of the economy is always directed to the future and intentionally regards the past as of no concern. This, in part, is one of the fundamental origins of modernity, the sense that the cultural present is discontinuous with the past. The fundamental unit of meaning in capitalist and economic thought is the object , that is, capitalism relies on the creation of a consumer culture, a large segment of the population that is not producing most of what it is consuming. Since capitalism, like mercantilism, is fundamentally based on distributing goodsmoving goods from one place to anotherconsumers have no social relation to the people who produce the goods they consume. In non-capitalist societies, such as tribal societies, people have real social relations to the producers of the goods they consume. But when people no longer have social relations with others who make the objects they consume, that means that the only relation they have is with the object itself. So part of capitalism as a way of thinking is that people become "consumers," that is, they define themselves by the objects they purchase rather than the objects they produce. Reference: http://www.wsu.edu/capitalism 2.Communism is exactly the opposite of capitalism. The factors of production and distribution are owned and managed by the state. It is also called a command economy or classless society.

The essential characteristics of communism are:

y

No private property

y y y y

No free competition No economic freedoms No profit motive Presence of central planning

3. Socialism is a combination of capitalism and communism. The major and strategic industries are owned and managed by the state while the minor industries belong to the private sector. Examples of major industries are transportation, electrification, mining and production of essential products. Examples of minor industries are the production and marketing of candies, cakes toys, etc. How to judge an economic system 1. Abundance. This refers to goods and services that individual members of society have received. Are these sufficient and are the people satisfied? Are there no problems in clothing, shelter, medicare education and recreation? 2. Growth. The growth of economy is tangible, and is measurable in terms of the number of buildings, houses, schools, cars, hospitals, factories or machines made in a given year. 3. Stability. This refers to the absence of inflation and unemployment. However, if the ups and downs of economic activities like production, consumption, and saving, among other things, are minimal there is still economic stability. 4. Security. Economic security generally depends on economic stability. Workers and employees do not lose their jobs if there is prosperity in the economy. 5. Efficiency. It simply means productivity. It is measured in terms of unit cost or average cost. 6. Justice and equity. Is the distribution of wealth, income and power among the members of society fair? Is there no big gap between the rich and the poor? 7. Economic freedom. If a consumer is free to choose his food, style of his house any kind of appliances his recreation or his education then there is economic freedom.

Four important people in the field of economics

Adam Smith Adam Smith was a Scottish moral philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations. The latter, usually abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. Adam Smith is widely cited as the father of modern economics. Smith studied moral philosophy at the University of Glasgow and Oxford University. After graduating he delivered a successful series of public lectures at Edinburgh,

leading him to collaborate with David Hume during the Scottish Enlightenment. Smith obtained a professorship at Glasgow teaching moral philosophy, and during this time wrote and published The Theory of Moral Sentiments. In his later life he took a tutoring position which allowed him to travel throughout Europe where he met other intellectual leaders of his day. Smith returned home and spent the next ten years writing The Wealth of Nations (mainly from his lecture notes) which was published in 1776. He died in 1790. The Wealth of Nations Adam Smith argues that it was market forces that ensured the production of the right goods and services. This would happen because producers would want to make profits by providing them. Without government intervention, thus forming a laissez-faire environment, public well-being would increase from competition organising production to suit the public. This was the basis of the free market economy. Competition would mean producers trying to outsell each other and this would bring prices down to their lowest possible levels (making minimal profit). If there was not enough competition, this would mean that producers would make more profit. This would soon attract more firms to join this industry, bringing prices down. All this would end up benefiting the consumer without any necessary intervention. This system had 2 requirements, however. One was that the market needed to be free of government intervention, and the other was that there had to be competition. Smith recognised immediately the danger of monopoly: "A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate." http://www.bized.co.uk/virtual/economy/library/economists/smithth.htm The Wealth of Nations expounds that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand".Smith opposed any form of economic concentration because it distorts the market's natural ability to establish a price that provides a fair return on land, labor, and capital. He advanced the idea that a market economy would produce a satisfactory outcome for both buyers and sellers, and would optimally allocate society's resources.The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". Smith believed that when an individual pursues his self-interest, he indirectly promotes the good of society: "by pursuing his own interest, [the individual] frequently promotes that of the society more effectually than when he intends to promote it."Self-interested

competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies. An often-quoted passage from The Wealth of Nations is: It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. The first page of the Wealth of Nations, 1776 London editionValue theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it" as influenced by its scarcity. Smith maintained that, with rent and profit, other costs besides wages also enter the price of a commodity.Other classical economists presented variations on Smith, termed the 'labour theory of value'. Classical economics focused on the tendency of markets to move to long-run equilibrium. Adam Smith's advocacy of self-interest based economic exchange did not, however, preclude for him issues of fairness and justice. In Asia, Europeans "by different arts of oppression..have reduced the population of several of the Moluccas,"he wrote, while "the savage injustice of the Europeans" arriving in America, "rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries."The Native Americans, "far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality." However, "superiority of force" was "so great on the side of the Europeans, that they were enabled to commit with impunity every sort of injustice in those remote countries." Smith also believed that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. However, if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. However, Smith's views on division of labour are not unambiguously positive, and are typically mis-characterized. Smith says of the division of labour: "In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently only one or two. ...The man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. ...His dexterity at his own particular trade seems, in this manner, to be acquired at the

expense of his intellectual, social, and martial virtues. ...this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it." On labor relations, Smith noted "severity" of laws against worker actions, and contrasted the masters' "clamour" against workers associations, with associations and collusions of the masters which "are never heard by the people" though such actions are "always" and "everywhere" taking place: "We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate...Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people." In contrast, when workers combine, "the masters..never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen." http://en.wikipedia.org/wiki/Adam_Smith David Ricardo David Ricardo was an English political economist, often credited with systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith.He is known for the so-called Iron Law of Wages, that wages naturally tend to a subsistence level.He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable personal fortune. Perhaps his most important contribution was the theory of comparative advantage, a fundamental argument in favor of free trade among countries and of specialization among individuals. Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource-rich country, highly-skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage. In 1815, Ricardo published his groundbreaking Essay on..Profits. There he introduced the differential theory of rent and the "law of diminishing returns" to land cultivation. Coincidentally, this principle was discovered simultaneously and independently by Malthus, Robert Torrens and Edward West. (more astoundingly, all of them published their tracts within three weeks in February, 1815!) In his 1815 Essay, Ricardo formulated his theory of distribution in a one-commodity ("corn") economy. With wages at their "natural" level, Ricardo argued that rate of profit and rents were determined

residually in the agricultural sector. He then used the concept of arbitrage to claim that the agricultural profit and wage rates would be equal to the counterparts in industrial sectors. With this theory, he could show that a rise in wages did not lead to higher prices, but merely lowered profits. For Ricardo, the appropriate theory was the "labor-embodied" theory of value or LTV, i.e. the argument that the relative "natural" prices of commodities are determined by the relative hours of labor expended in their production. Indeed, he began his 1817 book by criticizing Adam Smith's alternatives -- the "labor-commanded" and "adding up" theories of value -- because, he argued, that made value a function of wages and thus income distribution. For Ricardo, this was untenable. In his vision, value was independent of distribution, and thus only the "labor-embodied" theory made sense. However, Ricardo realized that when the question of capital comes in, a problem arose: specifically, as different industries apply different amounts of capital per laborer, then the rate of profit will also differ across industries. Ricardo understood that if he then assumed that the rates of profit across different industries were equalized (as free competition would imply), then, mathematically, relative prices would now vary with wages -- exactly what he had criticized Smith for! Ricardo realized that the labor theory of value would only work if the degree of capital-intensity was the same across all sectors, casting doubt on the generality of his cherished theory. Ricardo proposed two ways out of this dilemma. The first was the empirical argument that firms apply capital in a roughly proportional manner to the amount of labor invested. In this case, the resulting prices when profits are equalized would not differ much from the values implied by the LTV. This is what Stigler (1958) has called Ricardo's "93% labor theory of value". The second solution was to find a commodity which has the average capital per worker, so that its price would reflect labor-embodied value and thus not vary with changes in distribution. He called this the "invariable standard of value" . If one can find what this "standard" commodity is, Ricardo argued, then the rest of the analysis is simple. One can, say, change technology, trace the change in value of the standard commodity, and then extrapolate the change in value for all other commodities by the degree to which their capital composition deviates from this standard. Despite his search, Ricardo never found this standard commodity. On his death, an incomplete paper entitled "The Invariable Standard of Value" was found on his desk. Eventually, Karl Marx (1867) proposed one way out of it, but the proper solution would have to wait until Piero Sraffa (1960). On foreign trade, Ricardo set forth his famous theory of comparative advantage. Using his famous example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo's argument was that there are gains from trade if each nation specializes completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good. Notice that the differences in initial position mean that the labor theory of value is not assumed to hold across countries -- as it

should be, Ricardo argued, because factors, particularly labor, are not mobile across borders. As far as growth is concerned, foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically -- thereby leading to a lowering of the real wage and a rise in profits. But the main effect, Ricardo noted, is that overall income levels would rise in both nations regardless. John Maynard Keynes John Maynard Keynes,was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice. He advocated interventionist government policy, by which governments would use fiscal and monetary measures to mitigate the adverse effects of business cycles, economic recessions, and depressions. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots. In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would automatically provide full employment as long as workers were flexible in their wage demands. Following the outbreak of World War II Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics was so resounding that almost all capitalist governments adopted its policy recommendations. Keynesian economics (also called Keynesianism and Keynesian Theory) is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes. Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.The theories forming the basis of Keynesian economics were first presented in The General Theory of Employment, Interest and Money, published in 1936; the interpretations of Keynes are contentious, and several schools of thought claim his legacy. Keynesian economics advocates a mixed economypredominantly private sector, but with a large role of government and public sectorand served as the economic model during the latter part of the Great Depression, World War II, and the post-war Golden Age of Capitalism, 19451973, though it lost some influence following the stagflation of the 1970s. As a middle way between laissez-faire capitalism and socialism, it has been and continues to be attacked from both the right and the left.The advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought. Keynesian economics has provided the theoretical underpinning for the plans of President Barack Obama, Prime Minister Gordon Brown and other global leaders to, allegedly, rescue the world economy.

In Keynes's theory, there are some micro-level actions of individuals and firms that can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth. Some classical economists had believed in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation. Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest") through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment. A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a general tendency towards an equilibrium. In the 'neoclassical synthesis', which combines Keynesian macro concepts with a micro foundation, the conditions of general equilibrium allow for price adjustment to achieve this goal. Excessive saving To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline. Thomas Robert Malthus Thomas Robert Malthus was a British economist and demographer, whose famous Theory of Population highlighted the potential dangers of overpopulation. In his famous An Essay on the Principles of Population, Malthus stated that while 'the populations of the world would increase in geometric proportions the food resources available for them would increase only in arithmetic proportions'. In simple words, if human population was allowed to increase in an uncontrolled way, then the number of people would increase at a faster rate than the food supply. A point would come when human population would reach the limit up to which food sources could support it. Any further increase would lead to population crash caused by natural phenomena like famine or disease. The Theory

Malthus put forth his ideas in in six editions of his famous treatise 'An Essay on the Principle of Population'. His thinking took shape under the influence of the optimistic ideas of his father and his friends mainly Rousseau, about future improvement of the society. In the first edition of his treatise, Malthus put forth his views that opposed the belief of scholars like Marquis de Condorcet and William Godwin who were optimistic about population growth in England. During the Industrial Revolution, England experienced a steep increase in its population. In his book The Enquirer, William Godwin promoted population growth as a means for human beings to attain equality. According to him, an increased population would create more wealth that would provide food for the whole humanity. Scholars of such school of thought believed that, both man and society could be made perfect. In contrast to this viewpoint, Malthus interpreted overpopulation as an evil that would reduce the amount of food available per person. Malthus' theory was based on the assumption that the power of population is much greater than the power of the earth to provide subsistence for man. In his own words 'passion between the sexes is an inevitable phenomenon' hence, when unchecked, population would grow at such a high rate that it would outstrip food supply. According to Malthus, disease, food shortage and death due to starvation, were nature's way to control population. He proposed that human beings adopt measures like infanticide, abortion, delay in marriage and strict following of celibacy to check population growth. According to him, human society could never be perfected. He believed that man is a lazy animal, who would lead a satisfied life and procreate as long as his family was well fed. However, as soon as human population would feel constraints in food supply due to increase in population, he would again work hard to provide enough for his family. This might lead to an increase in agricultural production to provide for all, but at the same time man would be back to his complacent stage, where all his needs would be fulfilled. This would start the cycle of overpopulation and food shortage, all over again. Having been a clergy, Malthus validated his theory on moral grounds that suffering was a way of making human beings realize the virtues of hard work and moral behavior. Such kind of suffering due to overpopulation and food supply was inevitable. Impact Malthus' theory had great influence on both Charles Darwin and Alfred Wallace, who are the co-founders of the modern evolutionary theory. In his own words Darwin acknowledged, that he was already aware of the 'struggle for existence' among different species of plants and animals. However, it was only after he read Malthus' work were he realized that animals in their struggle to survive, retained the favorable features that would help them adjust to the environment, and lost those that were of no use to them. Thus the Theory of Natural Selection was born. By the end of the 19th Century, when living standards improved and birth rates dropped in the Western countries, concerns of overpopulation became irrelevant. However, in underdeveloped countries which are have agrarian economies, Malthus' theory often finds credibility.

Criticism Some critics of Malthus, like Karl Marx, argued that Malthus failed to recognize the potential of human population to increase food supply. Malthus is accused by many to have failed to comprehend man's ability to use science and technology to increase food supply to meet the needs of an increasing population. Thinkers from the field of social sciences have criticized Malthus for his belief that the human society could never be made perfect. Malthus opposed all political, social and economic reforms that did not aim at controlling birth rate. His own methods of checking population growth was criticized as being impractical. Malthus was opposed to the Poor Laws popular in England, which provided relief to the people who qualified as poor under the laws. According to him, such charity would provide only short term relief to them and let the poor remain in their state of financial distress. This thought of Malthus, was viewed as misanthropic. From his writings some have interpreted Malthus as a rigid and pessimistic individual. However, he is also viewed by some as a pragmatic thinker, who put a check on the unbridled enthusiasm of some who viewed increase in population as a means of progress. http://www.buzzle.com/articles/thomas-malthus-theory-of-population.html

The Theory of Wants

Demand and Consumer Behavior Theory of consumer behavior 1. Law of marginal utility. Utility means satisfaction. Of a consumer whenever he consumes one more unit of the same good. Consumption of more successive units of the same good increases total utility, but at a decreasing rate because marginal utility diminishes. For example, 1 cone of ice cream gives satisfaction to the individual. Consumption of another cone of ice cream of the same kind gives an additional satisfaction. Again he consumes the third cone of ice cream of the same kind. His total satisfaction has increased by consuming 3 cones of ice cream in just one sitting. But his additional satisfaction from the third cone of ice cream is lesser than his additional satisfaction from the second cone of ice cream. 2. Indifference curve. The word indifference means showing no bias or neutral. Supposing there are five combinations of two products (like meat and fish): the first combination constitutes 5 kilos of meat and 1 kilo of fish while another combination is composed of 5 kilos of fish and 1 kilo of meat and so on. Since all the combinations give the same satisfaction or utility, the consumer would be

indifferent as to which combination he receives. This means any combination would be desirable to him. The Law of Demand and Supply Demand Demand is the schedule of various quantities of commodities which buyers are willing and able to purchase at a given price, time, and place. Determinants of demand explained 1. Income people buy more goods and services when their incomes increase. Poor people who become rich naturally purchase more basic goods like food, clothing and shelter; and services like recreation, medicare and education. 2. Population more people means more demand for goods and services. There are more consumers in an urban community than in a rural community. 3. Tastes and preferences demand for goods and services increases when people like or prefer them. Such tastes or preferences are greatly influenced by advertisement or fashion. On the other hand, if a certain product is out of fashion, the demand for it falls. 4. Price expectation when people expect the prices of goods especially basic commodities like rice, soap, cooking oil, or sugar to increase tomorrow or next week they buy more of these products. 5. Prices of related goods when the price of a certain product increases, people tend to buy a substitute product (competitor). For example, if the price of tide increases, consumers buy less of tide and more of the other close substitutes like breeze. The law of demand Consumers are most likely to buy more goods and services as price decreases, and buy less goods and services as price rises. This is the law of demand. Such general tendencies of consumers can be explained by two reasons: 1. Income effect. At lower prices, an individual has a greater purchasing power. This means he can buy more goods and services. But at higher prices, naturally he can buy less. 2. Substitution effect. Consumers tend to buy goods with lower prices. In case the price of a product that they are buying increase, they look for substitutes whose prices are lower. Validity of the law of demand The law of demand states: as price increases, quantity demanded decreases, and as price decreases, quantity demanded increases. Such theory is only true if the

assumption of ceteris paribus is applied. It means all other things equal or constant. The law of demand is correct if the determinants of demand are held constant; that is there is no change in income, taste or population. Changes in demand vs. changes in quantity demanded Changes in demand refer to changes in the determinants of demand like income, population, price expectation and so forth. Supply Supply is the schedule of various quantities of commodities which producers are willing and able to produce and offer at a given price, place and time. Determinants of supply explained 1. Technology. This refers to the techniques or methods of production. Modern technology-which uses a modern machine increases supply of goods. 2. Cost of production. In producing goods, raw materials are needed, together with laborers. If the price of raw materials or the salaries of laborers increase, it means higher cost of production. 3. Number of sellers. More sellers or more factories mean an increase in supply. Smaller number of sellers or factories means less supply. 4. Prices of other goods. Changes in the price of goods affect the supply of such goods. For example, a decrease in the price of rice may likely encourage a rice farmer to produce more corn if this gives him more profit. 5. Price expectations. If producers expect prices to rise very soon, they usually keep their goods and then release them in the market when the prices are already high. 6. Taxes and subsidies. Certain taxes increase cost of production. Higher taxes discourage production because it reduces the earnings of businessmen. Law of supply As price increases, quantity supply also increases, and as price decreases, quantity supply also decreases. This direct relationship between price and quantity supplied is the law of supply. Producers are willing and able to produce and offer more goods at a higher price than at a lower price. However, the law of supply is only correct if we apply the assumption of ceteris paribus. This means the law of supply is valid if the determinants of supply like cost of production or technology are held constant. The law of supply and demand In the market, supply and demand interact freely. Supply is represented by producers or sellers while demand is represented by buyers. Producers are willing and able to offer

more goods at higher prices. This is the law of supply. On the other hand, buyers are willing and able to purchase at lower prices. This is the law of demand.