Opportunity cost and the Production Possibilities Curve Video transcript As we begin our journey into the world of economics, I thought I would begin with a quote from one of the most famous economists of all time, the Scottish philosopher Adam Smith. And he really is kind of the first real economist in the way that we view it now. And this is from his The Wealth of Nations, published incoincidentally, the same year as the American Declaration of Independence, and it's one of his most-famous excerpts.
The factory system developed out of trade in cotton textiles, when merchants, discovering an apparently insatiable worldwide market, became interested in increasing production in order to have more to sell. The factory system led to the use of power to supplement human muscle, followed in turn by the application of science to technology, which in an ever-accelerating spiral has produced the scope and complexity of modern industry.
The economic theory of the late 19th century, which is still influential in academic teaching, was, however, concerned with the allocation of existing resources between different uses rather than with technical progress.
This theory was highly abstract.
His system of mathematical equations was ingenious, but there are two serious limitations to the mechanical analogy upon which they were based: Though economists have always admitted the abstract nature of the theory, they generally have accepted the doctrine that the free play of market forces tended to bring about full employment and an optimum allocation of resources.
On this view, unemployment could only be caused by wages being too high. This doctrine was still influential in the Great Depression of the s.
Modifications of the theory The change in view that was to become known as the Keynesian Revolution was largely an escape to common sense, as opposed to abstract theory. In a private-enterprise economy, investment in industrial installations and housing construction is aimed at profitability in the future.
Because investment therefore depends upon expectations, unfavourable expectations tend to fulfill themselves—when investment outlay falls off, workers become unemployed; incomes fall, purchases fall, unemployment spreads to the consumer goods industries, and receipts are reduced all the more.
The operation of the market thus generates instability. The market may also generate instability in an upward direction.
A high level of effective demand leads to a scarcity of labour; rising wages raise both costs of production and incomes so that there is a general tendency to inflation.
While the English economist John Maynard Keynes was attacking the concept of equilibrium in the market as a whole, the notion of equilibrium in the market for particular commodities was also being undermined.
Traditional theory had conceived of a group of producers as operating in a perfect market for a single commodity; each produced only a small part of the whole supply; for each, the price was determined by the market; and each maximized its profits by selling only as much as would make marginal cost equal to price—that is to say, only so much that to produce a little more would add more to costs than it would to proceeds.
Each firm worked its plant up to capacity—i. A theory of imperfect competition was invented to reconcile the traditional theory with under-capacity working but was attacked as unrealistic.
The upshot was a general recognition that strict profit maximizing is impossible in conditions of uncertainty; that prices of manufactures are generally formed by adding a margin to direct costs, large enough to yield a profit at less than capacity sales; and that an increase in capacity generally has to be accompanied by a selling campaign to ensure that it will be used at a remunerative level.
Once it is recognized that competition is never perfect in reality, it becomes obvious that there is great scope for individual variations in the price policy of firms.
No precise generalization is possible.
The field is open for study of what actually happens, and exploration is going on. Meanwhile, however, textbook teaching often continues to seek refuge in the illusory simplicity of the traditional theory of market behaviour.This is the HR interview questions and answers on "Tell me about yourself.".
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