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Definitions of Economics
A social science that studies how individuals, governments, firms and nations
make choices on allocating scarce resources to satisfy their unlimited wants.
Economics can generally be broken down into: macroeconomics, which
concentrates on the behavior of the aggregate economy; and microeconomics,
which focuses on individual consumers.
A social science concerned chiefly with description and analysis of the production,
distribution, and consumption of goods and services
The theories, principles, and models that deal with how the market process works.
It attempts to explain how wealth is created and distributed in communities, how
people allocate resources that are scarce and have many alternative uses, and
other such matters that arise in dealing with human wants and their satisfaction.
The science that deals with the production, distribution and consumption of goods
and services, or the material welfare of humankind.

Contributors in the Development of Economics

Adam Smith was a pioneer of political economy and a thinker of modern economics. Due
to his extensive work in economics and for being the most influential thinkers in modern
economics, Smith was accorded the title of Father of Modern Economics. He is mostly
known for his book on The Wealth of Nations which has become the Bible of Capitalism.
Adam Smith advanced the idea of Absolute Advantage
Theory which refers to the ability of a party to produce a
particular good at a lower absolute cost than the other. He
proposed two requirements in his system: the market must
be free from government intervention and competition
must be in full range. He believed that producers, in order
to earn profit, provide right goods and services as a
consequence of market forces. Without government
intervention, he further argued, a laissez faire environment
is possible where competition exists to cater for organized
production to suit the public. Hence, an increase in public
well-being is inevitable. He introduced the basis of the free
market economy competition would benefit both the
producers and consumers. He concluded that the greater
the competition, the greater the producers profit. According to him, when there is
competition, the prices of commodity tend to decrease which result to more demands
and thus would mean more profit.
David Ricardo is most remembered for his Theory of Comparative Advantage which
explains how trade can create value for both parties even when one can produce all
goods, with fewer resources than the other. He termed the net benefits of such an
outcome as gain from trade. His basic definition of comparative advantage is the
ability of an individual, a firm or a country to produce a particular good or service at a

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lower marginal cost and opportunity cost than another

contributed the
of fiscal
equivalence which is an economic theory that suggests
that the governments initiative to increase debt-financed
government spending for the purpose of stimulating
demand do not actually affect the demand due to the
publics consciousness to save excess money for the
payment of future tax increases in lieu of the debt
settlement. He established the Theory of Rent which is
directly tied to the marginal productivity of the land. The
basis of this theory is his analogy that population growth
equals more mouth to feed, more mouth to feed equals
the need for more grains and the need for more grains
equals the need for more land. This led to the view that an increase in food cost, salary
and profit is an advantage for the land owners while the case is otherwise for the
capitalist. The Theory of Value which is tied directly to labor cost is another Ricardian
principle. It states an direct proportion between price of goods and the natural price of
labor. He claimed that labor like all other goods which are purchased and sold, or which
may increased or decreased in quantity, has its natural
price and market price. The natural price of labor is the
price which is necessary to enable constant subsistence
and perpetuation. Finally, he postulated the Theory of
Distribution which is inextricably linked to the theories of
rent and value. He pointed out that the return of the land
is not constant as the amount of capital available does not
equate to similar growth rate, the land suffers from
diminishing returns. The maximum level of economic rent
results from the marginal cultivation of the land.
Thomas Malthus had two major contributions to the
modern economic system: the population theory and the
theory of market gluts. The Population Theory had great in
influence on both Charles Darwin and Alfred Wallace as
this theory led to the formulation of the theory of natural selection. The basis of this
theory is the assumption that the power of population supersedes the power of the earth
to provide subsistence for man. The argument that the passion between sexes is an
inevitable phenomenon projects dramatic growth in population which bring about
shortage in food supply. However, population can be controlled either naturally or by the
aid of human measures. The natural factors are disease, food shortage and death due to
starvation while the human measures are infanticide, abortion, delay in marriage and
strict rules on celibacy. On condition that the population is uncontrolled, agricultural
production is on the increase to provide for over population and food shortage. In order
to validate this theory on moral grounds he maintains the thought that suffering is a way
of making human beings realize the virtues of hard work and moral behavior. He also
noted that such kind of suffering due to over population is an expected outcome. On the
other hand, the Theory of Market Gluts is centered on the factors of wealth and poverty,
which gave light to the recognition of the key to the accumulation of capital in the
distribution of income. Gluts are consequences of a decline in profits brought about by
insufficient demand. The reason for such insufficiency is the disproportion in the income
distribution. In view of this, saving by capitalists results to demand reduction;
consumption by landlords increases demand. Therefore, a redistribution of income from
landlords to capitalists precipitates crisis. In order to eliminate gluts and promote

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economic growth Malthus advocates redistributing income to the renter and increasing
government spending. He believes that the capitalists produce more than they consume
so that the landlords can consume more than they produce.
John Stuart Mill wrote the Principles of Political Economy, which became the leading
economic textbook for forty years after it was written. He elaborated on the ideas of
David Ricardo and Adam Smith. He helped develop the ideas of economies of scale,
opportunity cost and comparative advantage in trade.
Mills analysis is fundamentally grounded in his broader
approach to economics the view that economic activity is
only a part of all activities or basically termed as Mills
Economics. Firstly, Mill identified that two forces:
competition and custom, govern the distribution of income,
and he criticized the orthodox line of English economists for
emphasizing the role of competition while almost completely
neglecting the role of custom. He pointed out that the
operation of competition in the market economy is
comparatively young historical phenomenon and that, if we
glance backward, we find that custom has traditionally
played a major role in solving the economic problems
surrounding the distribution of income.

Karl Marx believes that the basic determining factor of

human history is Economics. He advanced the idea that
exchanges of equal value for equal value is fundamental to
an ideal economic system where the amount of work put
into whatever is being produced is the determinant of value.
He absolutely disagreed with capitalism which he described
as profit motivated a desire to produce an uneven
exchange of lesser value for greater value. So his belief had
a great influence on communism, where all the factors of
production and all the industries are owned and managed by
the state. This is also known as command economy, where
private property ownership is not allowed. Economics, then,
are what constitute the base of all of human life and history
generating division of labor, class struggle, and all the
social institutions which are supposed to maintain the status quo. Those social
institutions are a superstructure built upon the base of economics, totally dependent
upon material and economic realities but nothing else. All of the institutions which are
prominent in our daily lives marriage, church, government, arts, etc. can only be
truly understood when examined in relation to economic forces.
Leon Walras biggest contribution in economics is the General Equilibrium Theory and
he is also one of the founders of the marginal revolution by postulating the idea of
marginal utility. The general equilibrium theory studies the fundamentals of supply and

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demand in an economy with multiple markets, with the

objective of proving that all prices are at equilibrium. This theory
analyzes the mechanism by which the choices of economic
agents are coordinated across markets. It attempts to look at
several markets simultaneously rather than a single market in
isolation. On the other hand, marginal utility is defined as the
additional satisfaction or benefit that a consumer derives from
buying an additional unit of a commodity or service. The
concept implies that the utility or benefit to a consumer of an
additional; unit of a product is inversely related to the number of
units of that product he already owns.

Alfred Marshalls main argument is that the economy is an

evolutionary process in which technology, market institutions and
peoples preferences evolve along with peoples behavior. He
introduced the idea of 3 periods namely, Market Period, Short
Period and Long Period, to understand how markets adjust to
changes in supply or demand over time. Market Period is the
amount of time for which the stock or commodity is fixed.
Meanwhile, the time in which the supply can be increased by
adding labor and other inputs but not adding capital is known as
Short Period. Lastly, Long Period means the amount of time taken
for capital to be increased. Marshalls basic approach to welfare
economic still stands today. In his most important book, Principles
of Economics, he was able to quantify the buyers sensitivity to
price. He emphasized that the supply and demand determines the
price output of a good: the two curves are like scissor blades that intersect at
equilibrium. This concept is otherwise known as Price Elasticity of Demand. He proposed
that the price is basically parallel for each unit of commodity that a consumer buys, but
the value to the consumer of each additional unit declines. In line with this he illustrated
the benefits of the consumer from market surplus. He termed these benefits as
Consumer Surplus which is equated as the size of the benefit equals the difference
between the consumers value of all the units and the amount paid for the units. In other
words, the consumers pay less than the value of the good to themselves. Lastly, he also
introduced the concept of Producer Surplus which is the amount the producer is actually
paid minus the amount that he would willingly accept.
Thorstein Veblens greatest contribution to economics is the
introduction of the concept, conspicuous consumption. In his
widely known book, The Theory of Leisure Class, he defined
conspicuous consumption as the consumption undertaken to
make a statement to others about ones class or
accomplishments. He broadened the views of other economists
regarding understanding the social and cultural causes and
effects of economic changes. He advocated the identification of
the causes and effects of shifting from one source of income to

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John Meynard Keynes revolutionized the economists

conceptions about economics. Keynes General Theory of
Employment, Interest and Money, for instance, introduced
the notion of aggregate demand as the sum of
consumption, investment and government spending. His
reason is that it is apparent that maintenance of full
employment mainly depends on the support of
government spending. Although his thought was not
favored by economists he argued that his theory aim to
stabilize wages. Moreover, his insight was that a general
cut of wages tends to decrease income, consumption and
aggregate demands which lead to positive contributions of
lower price of labor. This theory advocated deficit spending
during economic downturns to maintain full employment.
Keynes believed in monetarism or the quantity theory of money. His major policy view
was that the approach to uphold economic stability is to stabilize the price level, and that
to reach the possibility, there is a need for the governments central bank to lower the
interest rates when prices tend to rise and raise when prices tend to fall. In his eloquent
book entitled, The Economic Consequences of the Peace, he wrote an excellent
economic analysis of reparations. This book also contains an insightful analysis of the
Council of Four (Georges Clemenceau of France, Prime Minister David Lloyd George of
Britain, President Woodrow Wilson of the United States, and Vittorio Orlando of Italy).
Keynes was one of the advocates of the postwar system of fixed exchange rates.
Irving Fisher pioneered the construction and the use of
price indexes. His own Index Number Institute computed
price indexes worldwide from 1923 to 1936. He also initiated
the clear distinction between real and nominal interest rates
which is still the basic principle in modern economy. He
pointed out that the real interest rate is equal to the nominal
interest rest minus the expected inflation rate. He was also a
founder or president of numerous associations and agencies
including the Econometric Society and the American
Economic Association. Fisher advocated a more modern
quantity theory of money which functions reasonably well in
assuming the consistency of economy. He formulated his
theory in terms of the equation of exchange, which says that
MV = PT, where M equals the stock of money; V equals
velocity or the speed of money circulation in an economy; P equals the price level; and T
equals the total volume of transactions. Moreover, the contemporary economic models of
interest are based on Fisherian principles. For one, Fishers principle of money and prices
conceptualized monetarism. He called interest an index of a communitys preference for
a dollar of present income over a dollar of future income. He postulated that Interest
rates result from the interaction of two forces: the time preference and the Investment
Opportunity Principle (the present income investment will yield more future income
investment). His Capital theory which states that the value of capital is the present value
of the flow of income that the asset generates is still widely held these days. His
reasoning on consumption taxes to replace conventional income taxation gave light to
double taxation of savings, and clearly became an insight to understand that this double
taxation biases the tax code against saving and in favor of consumption.

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All points considered, the contributions of the highly praised economists in their times
focused mainly on the factors of production, supply and demand and market models.
From their principles we now acquire a set of economic institutions that dominates a
given economy, from their theories, three major economic systems in the present day
societies were born. First is capitalism where the factors of production are owned by the
private individuals or corporation, second is socialism which is a bridge between
capitalism and socialism, under this system, the major factors of production distribution
and industries are owned and managed by the state, while the minor industries are
owned by the private sector, and last is communism, which is exactly the opposite of
capitalism. In the future more and more economists will be born, more theories will be
formulated for the quest of economic growth.

Lionel Charles Robbins, Baron Robbins, CH, CB, FBA (22

November 1898 15 May 1984) was a British economist and body of
the economics department at the London School of Economics. He is
known for his leadership at LSE, his proposed definition of
economics, and for his instrumental efforts in shifting Anglo-Saxon
economics from its Marshallian direction.
Robbins is famous for his definition of economics:
"Economics is the science which studies human behaviour as
a relationship between ends and scarce means which have
alternative uses."[