THE UNIVERSITY OF ZAMBIA

DEPARTMENT OF ADULT EDUCATION & EXTENTION STUDIES

STUDENT NAME: Alex Muketoi

ID:133866/97/1
Program: Business Administration
COURSE: Economics
CODE: 1110
CENTER: CHIRUNDU
ASSIGNMENT GIVEN DATE: 01/04/2020
ASSIGNMENT DUE DATE: 31/04/2020

QUESTIONS
1.Define Economics.
2.Define Economics according to;
(a). Adam smith
3. Define;
(a).Classical Economics.
(b). Neo classical Economics.
(c). Keynesian Economics.
(d). Monetary Economics.
(e). Modern Economics.
What is Economics?
Economics comes from the ancient Greek word “oikonomikos” or “oikonomia.”
Oikonomikos literally translates to “the task of managing a household.” French
mercantilists used “economie politique” or political economy as a term for matters
related to public administration.
In modern day Economics is defined as the study of how society uses its limited
resources. Economics is a social science that deals with the production, distribution, and
consumption of goods and services.

Adam Smith’s Definition of Economics

Adam Smith was a Scottish philosopher, widely considered as the first modern
economist. Smith defined economics as “an inquiry into the nature and causes of the
wealth of nations.”

Criticism of Smith’s Definition

The wealth-centric definition of economics limited its scope as a subject and was seen
as narrow and inaccurate. Smith’s definition forced the subject to ignore all non-wealth
aspects of human existence.
The Smithian definition over-emphasized the material aspects of well-being and ignored
the non-material aspects. It was assumed that human beings acted as rational economic
agents who mindlessly strived to maximize their own well-being.
The Smithian definition prevents the subject from exploring the concept of resource
scarcity. The allocation and use of scarce resources are seen as a central topic of
analysis in modern economics.

CLASSICAL ECONOMICS

Classical economics and many of its ideas remain fundamental in economics, though
the theory itself has yielded, since the 1870s, to neoclassical economics.

Classical economics or classical political economy is a school of thought in economics

that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main
thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert
Malthus, and John Stuart Mill. These economists produced a theory of market
economies as largely self-regulating systems, governed by natural laws of production
and exchange (famously captured by Adam Smith's metaphor of the invisible hand).

Adam Smith's The Wealth of Nations in 1776 is usually considered to mark the beginning
of classical economics.[1] The fundamental message in Smith's book was that the
wealth of any nation was determined not by the gold in the monarch's coffers, but by its
national income. This income was in turn based on the labor of its inhabitants, organized
efficiently by the division of labour and the use of accumulated capital, which became
one of classical economics' central concepts.[2]

In terms of economic policy, the classical economists were pragmatic liberals,

advocating the freedom of the market, though they saw 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 interest, 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. He warned repeatedly of the dangers of monopoly, and stressed the
importance of competition.[1] In terms of international trade, the classical economists
were advocates of free trade, which distinguishes them from their mercantilist
predecessors, who advocated protectionism.

The designation of Smith, Ricardo and some earlier economists as "classical" is due to
Karl Marx, to distinguish the "greats" of economic theory from their "vulgar" successors.
There is some debate about what is covered by the term classical economics,
particularly when dealing with the period from 1830–75, and how classical economics
relates to neoclassical economics.

HISTORY OF CLASSICAL ECONOMICS

The classical economists produced their "magnificent dynamics"[3] during a period in
which capitalism was emerging from feudalism and in which the Industrial Revolution
was leading to vast changes in society. These changes raised the question of how a
society could be organized around a system in which every individual sought his or her
own (monetary) gain. Classical political economy is popularly associated with the idea
that free markets can regulate themselves.[4]

Classical economists and their immediate predecessors reoriented economics away

from an analysis of the ruler's personal interests to broader national interests. Adam
Smith, following the physiocrat François Quesnay, identified the wealth of a nation with
the yearly national income, instead of the king's treasury. Smith saw this income as
produced by labour, land, and capital. With property rights to land and capital held by
individuals, the national income is divided up between labourers, landlords, and
capitalists in the form of wages, rent, and interest or profits. In his vision, productive
labour was the true source of income, while capital was the main organizing force,
boosting labour's productivity and inducing growth.

Ricardo and James Mill systematized Smith's theory. Their ideas became economic
orthodoxy in the period ca. 1815–1848, after which an "anti-Ricardian reaction" took
shape, especially on the European continent, that eventually became
marginalist/neoclassical economics.[5] The definitive split is typically placed
somewhere in the 1870s, after which the torch of Ricardian economics was carried
mainly by Marxian economics, while neoclassical economics became the new orthodoxy
also in the English-speaking world.

Henry George is sometimes known as the last classical economist or as a bridge. The
economist Mason Gaffney documented original sources that appear to confirm his
thesis arguing that neoclassical economics arose as a concerted effort to suppress the
ideas of classical economics and those of Henry George in particular.

Classical theories of growth and development

Analyzing the growth in the wealth of nations and advocating policies to promote such
growth was a major focus of most classical economists. However, John Stuart Mill
believed that a future stationary state of a constant population size and a constant stock
of capital was both inevitable, necessary and desirable for mankind to achieve. This is
now known as a steady-state economy.

John Hicks & Samuel Hollander,Nicholas Kaldor,Luigi L. Pasinetti, and Paul A. Samuelson
have presented formal models as part of their respective interpretations of classical
political economy.

The Classical Theory

The fundamental principle of the classical theory is that the economy is self‐regulating.
Classical economists maintain that the economy is always capable of achieving the
natural level of real GDP or output, which is the level of real GDP that is obtained when
the economy's resources are fully employed. While circumstances arise from time to
time that cause the economy to fall below or to exceed the natural level of real GDP,
self‐adjustment mechanisms exist within the market system that work to bring the
economy back to the natural level of real GDP. The classical doctrine—that the economy
is always at or near the natural level of real GDP—is based on two firmly held beliefs:
Say's Law and the belief that prices, wages, and interest rates are flexible.

Say's Law. According to Say's Law, when an economy produces a certain level of real
GDP, it also generates the income needed to purchase that level of real GDP. In other
words, the economy is always capable of demanding all of the output that its workers
and firms choose to produce. Hence, the economy is always capable of achieving the
natural level of real GDP.

The achievement of the natural level of real GDP is not as simple as Say's Law would
seem to suggest. While it is true that the income obtained from producing a certain level
of real GDP must be sufficient to purchase that level of real GDP, there is no guarantee
that all of this income will be spent. Some of this income will be saved. Income that is
saved is not used to purchase consumption goods and services, implying that the
demand for these goods and services will be less than the supply. If aggregate demand
falls below aggregate supply due to aggregate saving, suppliers will cut back on their
production and reduce the number of resources that they employ. When employment of
the economy's resources falls below the full employment level, the equilibrium level of
real GDP also falls below its natural level. Consequently, the economy may not achieve
the natural level of real GDP if there is aggregate saving. The classical theorists'
response is that the funds from aggregate saving are eventually borrowed and turned
into investment expenditures, which are a component of real GDP. Hence, aggregate
saving need not lead to a reduction in real GDP.

Consider, however, what happens when the funds from aggregate saving exceed the
needs of all borrowers in the economy. In this situation, real GDP will fall below its
natural level because investment expenditures will be less than the level of aggregate
saving. This situation is illustrated in Figure 1.

Aggregate saving, represented by the curve S, is an upward‐sloping function of the

interest rate; as the interest rate rises, the economy tends to save more. Aggregate
investment, represented by the curve I, is a downward‐sloping function of the interest
rate; as the interest rate rises, the cost of borrowing increases and investment
expenditures decline. Initially, aggregate saving and investment are equivalent at the
interest rate, i. If aggregate saving were to increase, causing the S curve to shift to the
right to S′, then at the same interest rate i, a gap emerges between investment and
savings. Aggregate investment will be lower than aggregate saving, implying that
equilibrium real GDP will be below its natural level.

Flexible interest rates, wages, and prices. Classical economists believe that under these
circumstances, the interest rate will fall, causing investors to demand more of the
available savings. In fact, the interest rate will fall far enough—from i to i′ in Figure —to
make the supply of funds from aggregate saving equal to the demand for funds by all
investors. Hence, an increase in savings will lead to an increase in investment
expenditures through a reduction of the interest rate, and the economy will always return
to the natural level of real GDP. The flexibility of the interest rate as well as other prices
is the self‐adjusting mechanism of the classical theory that ensures that real GDP is
always at its natural level. The flexibility of the interest rate keeps the money market, or
the market for loanable funds, in equilibrium all the time and thus prevents real GDP
from falling below its natural level.

Similarly, flexibility of the wage rate keeps the labor market, or the market for workers, in
equilibrium all the time. If the supply of workers exceeds firms' demand for workers,
then wages paid to workers will fall so as to ensure that the work force is fully employed.
Classical economists believe that any unemployment that occurs in the labor market or
in other resource markets should be considered voluntary unemployment. Voluntarily
unemployed workers are unemployed because they refuse to accept lower wages. If they
would only accept lower wages, firms would be eager to employ them.

Graphical illustration of the classical theory as it relates to a decrease in aggregate

demand. Figure considers a decrease in aggregate demand from AD 1 to AD 2.

NEO CLASSICAL ECONOMICS

Neoclassical economics is a broad theory that focuses on supply and demand as the
driving forces behind the production, pricing, and consumption of goods and services. It
emerged in around 1900 to compete with the earlier theories of classical economics.

KEY TAKEAWAYS
Classical economists assume that the most important factor in a product's price is its
cost of production.
Neoclassical economists argue that the consumer's perception of a product's value is
the driving factor in its price.
They call the difference between actual production costs and retail price the economic
surplus.
One of the key early assumptions of neoclassical economics is that utility to consumers,
not the cost of production, is the most important factor in determining the value of a
product or service. This approach was developed in the late 19th century based on
books by William Stanley Jevons, Carl Menger, and Léon Walras.

Neoclassical economics theories underlie modern-day economics, along with the tenets
of Keynesian economics. Although the neoclassical approach is the most widely taught
theory of economics, it has its detractors.

Understanding Neoclassical Economics

The term neoclassical economics was coined in 1900. Neoclassical economists believe
that a consumer's first concern is to maximize personal satisfaction. Therefore, they
make purchasing decisions based on their evaluations of the utility of a product or
service. This theory coincides with rational behavior theory, which states that people act
rationally when making economic decisions.

Further, neoclassical economics stipulates that a product or service often has value
above and beyond its production costs. While classical economic theory assumes that a
product's value derives from the cost of materials plus the cost of labor, neoclassical
economists say that consumer perceptions of the value of a product affect its price and
demand.

Finally, this economic theory states that competition leads to an efficient allocation of
resources within an economy. The forces of supply and demand create market
equilibrium.

In contrast to Keynesian economics, the neoclassical school states that savings

determine investment. It concludes that equilibrium in the market and growth at full
employment should be the primary economic priorities of government.

The Case Against Neoclassical Economics

Its critics believe that the neoclassical approach cannot accurately describe actual
economies. They maintain that the assumption that consumers behave rationally in
making choices ignores the vulnerability of human nature to emotional responses.
 Neoclassical economists maintain that the forces of supply and demand lead to an
efficient allocation of resources.
Some critics also blame neoclassical economics for inequalities in global debt and trade
relations because the theory holds that labor rights and living conditions will inevitably
improve as a result of economic growth.

A Neoclassical Crisis?
Followers of neoclassical economics believe that there is no upper limit to the profits
that can be made by smart capitalists since the value of a product is driven by consumer
perception. This difference between the actual costs of the product and the price it is
sold for is termed the economic surplus.

However, this type of thinking could be said to have led to the 2008 financial crisis. In the
leadup to that crisis, modern economists believed that synthetic financial instruments
had no price ceiling because investors in them perceived the housing market as limitless
in its potential for growth. Both the economists and the investors were wrong, and the
market for those financial instruments crashed.

KEYNESIAN ECONOMICS
Keynesian economics is a theory that says the government should increase demand to
boost growth. Keynesians believe consumer demand is the primary driving force in an
economy. As a result, the theory supports expansionary fiscal policy. Its main tools are
government spending on infrastructure, unemployment benefits, and education. A
drawback is that overdoing Keynesian policies increases inflation.

The British economist John Maynard Keynes developed this theory in the 1930s. The
Great Depression had defied all prior attempts to end it. President Franklin D. Roosevelt
used Keynesian economics to build his famous New Deal program.1 In his first 100 days
in office, FDR increased the debt by $3 billion to create 15 new agencies and laws.2 3
For example, the Works Progress Administration put 8.5 million people to work.4 The
Civil Works Administration created 4 million new construction jobs.5

Keynes described his premise in “The General Theory of Employment, Interest, and
Money.” Published in February 1936, it was revolutionary.6 First, it argued that
government spending was a critical factor driving aggregate demand. That meant an
increase in spending would increase demand.

Second, Keynes argued that government spending was necessary to maintain full
employment.

Keynes advocated deficit spending during the contractionary phase of the business
cycle. But in recent years, politicians have used it even during the expansionary phase.
President Bush's deficit spending in 2006 and 2007 increased the debt.7 It also helped
create a boom that led to the 2007 financial crisis.8 President Trump is increasing the
debt during stable economic growth.9 That will also lead to a boom-and-bust cycle.
Keynes maintained in his seminal book, The General Theory of Employment, Interest, and
Money and other works that during recessions structural rigidities and certain
characteristics of market economies would exacerbate economic weakness and cause
aggregate demand to plunge further.

For example, Keynesian economics disputes the notion held by some economists that
lower wages can restore full employment, by arguing that employers will not add
employees to produce goods that cannot be sold because demand is weak. Similarly,
poor business conditions may cause companies to reduce capital investment, rather
than take advantage of lower prices to invest in new plants and equipment. This would
also have the effect of reducing overall expenditures and employment.

Keynesian Economics and the Great Depression

Keynesian economics is sometimes referred to as "depression economics," as Keynes's
General Theory was written during a time of deep depression not only in his native land
of the United Kingdom but worldwide. The famous 1936 book was informed by directly
observable economic phenomena arising during the Great Depression, which could not
be explained by classical economic theory.

In classical economic theory, it is argued that output and prices will eventually return to a
state of equilibrium, but the Great Depression seemed to counter this theory. Output was
low and unemployment remained high during this time. The Great Depression inspired
Keynes to think differently about the nature of the economy. From these theories, he
established real-world applications that could have implications for a society in
economic crisis.

Keynes rejected the idea that the economy would return to a natural state of equilibrium.
Instead, he argued that once an economic downturn sets in, for whatever reason, the fear
and gloom that it engenders among businesses and investors will tend to become
self-fulfilling and can lead to a sustained period of depressed economic activity and
unemployment. In response to this, Keynes advocated a countercyclical fiscal policy in
which, during periods of economic woe, the government should undertake deficit
spending to make up for the decline in investment and boost consumer spending in
order to stabilize aggregate demand

MONETARY ECONOMICS
What Is Money?
Money is an economic unit that functions as a generally recognized medium of
exchange for transactional purposes in an economy. Money provides the service of
reducing transaction cost, namely the double coincidence of wants. Money originates in
the form of a commodity, having a physical property to be adopted by market
participants as a medium of exchange. Money can be: market-determined, officially
issued legal tender or fiat moneys, money substitutes and fiduciary media, and
electronic cryptocurrencies.
Monetary economics is the branch of economics that studies the different competing
theories of money: it provides a framework for analyzing money and considers its
functions (such as medium of exchange, store of value and unit of account), and it
considers how money, for example fiat currency, can gain acceptance purely because of
its convenience as a public good.[1] The discipline has historically prefigured, and
remains integrally linked to, macroeconomics.[2] This branch also examines the effects
of monetary systems, including regulation of money and associated financial
institutions[3] and international aspects.[4]

Modern analysis has attempted to provide microfoundations for the demand for money[5]
and to distinguish valid nominal and real monetary relationships for micro or macro
uses, including their influence on the aggregate demand for output.[6] Its methods
include deriving and testing the implications of money as a substitute for other assets[7]
and as based on explicit frictions.

Monetary theory is based on the idea that a change in money supply is the main driver of
economic activity. It argues that central banks, which control the levers of monetary
policy, can exert much power over economic growth rates by tinkering with the amount
of currency and other liquid instruments circulating in a country's economy.

KEY TAKEAWAYS
Monetary theory posits that a change in money supply is the main driver of economic
activity.
A simple formula governs monetary theory, MV = PQ.
The Federal Reserve (Fed) has three main levers to control the money supply: The
reserve ratio, discount rate, and open market operations.
Money creation has become a hot topic of late under the “Modern Monetary Theory
(MMT)" banner.
Understanding Monetary Theory
According to monetary theory, if a nation's supply of money increases, economic activity
will rise, too, and vice versa. A simple formula governs monetary theory, MV = PQ. M
represents the money supply, V is the velocity (number of times per year the average
dollar is spent), P is the price of goods and services, and Q is the number of goods and
services. Assuming constant V, when M is increased, either P, Q, or both P and Q rise.

General price levels tend to rise more than the production of goods and services when
the economy is closer to full employment. When there is slack in the economy, Q will
increase at a faster rate than P under monetary theory.

In many developing economies, monetary theory is controlled by the central government,

which may also be conducting most of the monetary policy decisions. In the U.S., the
Federal Reserve Board (FRB) sets monetary policy without government intervention.

The FRB operates on a monetary theory that focuses on maintaining stable prices (low
inflation), promoting full employment, and achieving steady growth in gross domestic
product (GDP). The idea is that markets function best when the economy follows a
smooth course, with stable prices and adequate access to capital for corporations and
individuals.

Monetary Methods
In the U.S., it is the job of the FRB to control the money supply. The Federal Reserve (Fed)
has three main levers:

Reserve ratio: The percentage of reserves a bank is required to hold against deposits. A
decrease in the ratio enables banks to lend more, thereby increasing the supply of
money.
Discount rate: The interest rate that the Fed charges commercial banks that need to
borrow additional reserves. A drop in the discount rate will encourage banks to borrow
more from the Fed and therefore lend more to its customers.
Open market operations (OMO): This consists of buying and selling government
securities. Buying securities from large banks increases the supply of money while
selling securities contracts money supply in the economy.

MODERN ECONOMICS
Modern economics is a science of rational choice or decision-making under conditions
of scarcity.
definitions of the past and defines the subject as a social science. According to
Samuelson, “Economics is the study of how people and society choose, with or without
the use of money, to employ scarce productive resources which could have alternative
uses, to produce various commodities over time and distribute them for consumption
now and in the future among various persons and groups of society

CONCLUSION
As the science of decision-making, economic philosophy operates in our daily lives
whether we realize it or not. When we are evaluating the interest rates on our credit
cards or trying to decide whether to buy or lease a new car or go out to dinner or on
vacation, these are all decisions we make using economic thinking. We live in a world of
limited resources, and economics helps us decide how to use these limited inputs to
satisfy our never-ending list of wants and needs. Economics is also a large field with a
rich history that's been explored and examined by hundreds of influential people, ranging
from philosophers to politicians.

In its most simple and concise definition, economics is the study of how society uses its
limited resources. Economics is a social science that deals with the production,
distribution, and consumption of goods and services. Economics focuses heavily on the
four factors of production, which are land, labor, capital, and enterprise. These are the
four ingredients that make up economic activity in our world today and can each be
studied individually.
The study of economics is generally broken down into two disciplines;
1. Microeconomics
2.Macroeconomics

Microeconomics focuses on how individual consumers and firm make decisions; these
individuals can be a single person, a household, a business/organization or a
government agency. Analyzing certain aspects of human behavior, microeconomics tries
to explain they respond to changes in price and why they demand what they do at
particular price levels. Microeconomics tries to explain how and why different goods are
valued differently, how individuals make financial decisions, and how individuals best
trade, coordinate and cooperate with one another. Microeconomics' topics range from
the dynamics of supply and demand to the efficiency and costs associated with
producing goods and services; they also include how labor is divided and allocated,
uncertainty, risk, and strategic game theory.

13
Macroeconomics studies an overall economy on both a national and international level.
Its focus can include a distinct geographical region, a country, a continent, or even the
whole world. Topics studied include foreign trade, government fiscal and monetary
policy, unemployment rates, the level of inflation and interest rates, the growth of total
production output as reflected by changes in the Gross Domestic Product (GDP), and
business cycles that result in expansions, booms, recessions, and depressions.
Micro- and macroeconomics are intertwined; as economists gain an understanding of
certain phenomena, they can help us make more informed decisions when allocating
resources. Many believe that microeconomics' foundations of individuals and firms
acting in aggregate constitute macroeconomic phenomena.