Classical and Keynesians – Paper Scrap

Unfortunately my descriptions of different economic thoughts that we have discussed this semester won’t make the final paper, but here they are for your viewing pleaser!

 

Classical Economics

The first class of economics which had kicked off the main study of economics was the classical view of the economy. There was no differentiation between Macroeconomic or Microeconomic theory, but they did use evidence of microeconomic theory that we know of today and had applied it to macro economy to predict it. One of the most important conditions of the Classical Economic theory is that there is always perfect information in the market. There are zero transaction costs, all transactions are voluntary ,and there is an infinite number of buyers and sellers. These factors made the classical focus more on the supply side of the equilibrium. This was due to the classical economic thought that was developed by Jean Baptiste Say which had assumed: supply creates its own demand which had made an assumption that there will be no hoarding in the economy due to all income is either spent or saved (that it is invested). Another thing to add is that if there is excess supply then there will be excess demand, everything is evened out and there will never be excess supply in the economy. This assumption; Walras’ Law, if one good is more desirable it will rise in price, while less desirable goods will fall in price and aggregate supply side will never change.

 

Keynesian Economics

The basic idea behind the Keynesian economic model is economic theory of total spending in the economy and its effects on output and inflation. This theory and idea was brought up by John Keynes who was a British economist. He stumbled upon his believes by attempting to identify the factors behind the Great Depression. He had concluded that increased government expenditures as well as lower taxes will stimulate demand and influence the economy out of the Depression. This had led to a belief that optimal economic performance may one day be accomplished. This demand side theory of “Keynesian economics” suggest that ideal and efficient performance by the economy may be achieved and economic decline and detraction may be prevented by economic intervention by the government which would create policies to influence the aggregate demand.