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Field of Economics

Behavioral economics, along with the related sub-field behavioral finance, studies
the effects of psychological, social, cognitive, and emotional factors on
the economic decisions of individuals and institutions and the consequences
for market prices, returns, and resource allocation, although not always that
narrowly, but also more generally, of the impact of different kinds of behavior, in
different environments of varying experimental values.
Risk tolerance is a crucial factor in personal financial decision making. Risk
tolerance is defined as individuals' willingness to engage in a financial activity
whose outcome is uncertain.
Behavioral economics is primarily concerned with
the bounds of rationality of economic agents. Behavioral models typically
integrate insights from psychology, neuroscience and microeconomic theory; in
so doing, these behavioral models cover a range of concepts, methods, and fields.
The study of behavioral economics includes how market decisions are made and
the mechanisms that drive public choice. The use of the term "behavioral
economics" in U.S. scholarly papers has increased in the past few years, as shown
by a recent study.
There are three prevalent themes in behavioral finances:

Heuristics: Humans make 95% of their decisions using mental shortcuts

or rules of thumb.
Framing: The collection of anecdotes and stereotypes that make up the
mental emotional filters individuals rely on to understand and respond to
Market inefficiencies: These include mis-pricings and non-rational decision
Neoclassical economics is an approach to economics focusing on the determination
of goods, outputs, and income distributions in markets through supply and
demand. This determination is often mediated through a hypothesized
maximization of utility by income-constrained individuals and of profits by firms
facing production costs and employing available information and factors of
production, in accordance with rational choice theory.
Neoclassical economics dominates microeconomics, and together with Keynesian
economics forms the neoclassical synthesis which dominates mainstream
economics today. Although neoclassical economics has gained widespread
acceptance by contemporary economists, there have been many critiques of
neoclassical economics, often incorporated into newer versions of neoclassical
Three central assumptions
It was expressed by E. Roy Weintraub that neoclassical economics rests on three
assumptions, although certain branches of neoclassical theory may have different

1. People have rational preferences between outcomes that can be identified

and associated with values.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of full and relevant information.

Keynesian economics are the various theories about how in the short run
and especially during recessions economic output is strongly influenced
by aggregate demand (total spending in the economy). In the Keynesian
view, aggregate demand does not necessarily equal the productive capacity
of the economy; instead, it is influenced by a host of factors and sometimes
behaves erratically, affecting production, employment, and inflation.

Keynesian economists generally argue that, as aggregate demand is volatile

and unstable, a market economy will often experience inefficient
macroeconomic outcomes in the form of economic recessions (when
demand is low) and inflation (when demand is high). These can be mitigated
by economic policy responses, in particular, monetary policy actions by
the central bank and fiscal policy actions by the government, which can help
stabilize output over the business cycle. Keynesian economists generally
advocate a managed market economy predominantly private sector, but
with an active role for government intervention during recessions
and depressions.
Keynes argued that the solution to the Great Depression was to stimulate the
country ("inducement to invest") through some combination of two approaches:

1. A reduction in interest rates (monetary policy), and

2. Government investment in infrastructure (fiscal policy).

Classical economics (also known as liberal economics) asserts
that markets function best with minimal government interference. It was
developed in the late 18th and early 19th century by Adam Smith, Jean-Baptiste
Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. Many writers
found Adam Smith's idea of free markets more convincing than the idea, widely
accepted at the time, of protectionism.
Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the
beginning of classical economics. The fundamental message in Smith's influential
book was that the wealth of nations was based not on gold but on trade: That when
two parties freely agree to exchange things of value, because both see a profit in
the exchange, total wealth increases. Classical economics originally differed from
modern libertarian economics in seeing a role for the state in providing for the
common good. Smith acknowledged that there were areas where the market is not
the best way to serve the common good, and he took it as a given that the greater
proportion of the costs supporting the common good should be borne by those
best able to afford them.
Classical economists observe that markets generally regulate themselves, when
free of coercion. Adam Smith referred to this as a metaphorical "invisible hand",
which refers to the notion that private incentives are aligned with society welfare
maximization under certain competitive conditions. Smith warned repeatedly of
the dangers of monopoly, and stressed the importance of competition.
There is some debate about what is covered by the term "classical economics",
particularly when dealing with the period from 183075, and how classical
economics relates to Neoclassical economics.
The Classical economists took the theory of the determinants of the level and
growth of population as part of Political Economy. Since then, the theory of
population has been seen as part of Demography.
In contrast to the Classical theory, the determinants of the neoclassical theory

1. tastes
2. technology, and
3. endowments


Labour economics seeks to understand the functioning and dynamics of

the markets for wage labor.
Labour markets or job markets function through the interaction of workers and
employers. Labour economics looks at the suppliers of labour services (workers)
and the demanders of labour services (employers), and attempts to understand the
resulting pattern of wages, employment, and income.
In economics, labour is a measure of the work done by human beings. It is
conventionally contrasted with such other factors of
production as land and capital. There are theories which have developed a concept
called human capital (referring to the skills that workers possess, not necessarily
their actual work).
Macro and micro analysis of labor markets
There are two sides to labour economics. Labour economics can generally be seen
as the application of microeconomic or macroeconomic techniques to the labour
market. Microeconomic techniques study the role of individuals and individual
firms in the labour market. Macroeconomic techniques look at the interrelations
between the labour market, the goods market, the money market, and the foreign
trade market. It looks at how these interactions influence macro variables such as
employment levels, participation rates, aggregate income and gross domestic