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EMD - Unit 2 - SLM
EMD - Unit 2 - SLM
7 A country’s living
standard is dependent on 8 If the government
its capability to produce prints excess currency,
goods and services. prices will rise.
Principle 2: What you Give up for Something is its Cost Principle 3: Rational People Think at the Margin
As per the economic theory, when presented with a choice to select Economists hold the view that in order to make rational decisions,
one from among numerous alternatives, we probably always try people consider their opportunities and objectives. Sometimes,
to choose the best option. Opportunity cost is defined as the next rational people make a marginal change to the existing plan of
possible best alternative that has to be given up during the selection action. Managers compare the marginal cost and marginal benefit
process in order to choose the best one. For example, if we are to arrive at a decision.
unwell and have to choose among medicines, clothes and a movie,
we are most likely to choose medicines over the other two options. For example, an airline has 500
The opportunity cost of medicines will be the next best alternative. passenger seats available for a flight.
Yes. If the plane has 12 empty seats just before flying, the airline
can decide the fare at Rs. 300 to attract the last-minute passengers.
It makes sense for the airline to sell those 12 tickets at a cost less Principle 5: Markets are Usually a Good way to Organize
than Rs. 400 as the additional cost of flying these passengers is Economic Activity
small. It is the marginal cost of the ticket, i.e., a bag of peanuts and a
People carry out buying and selling of goods and services in markets.
little extra fuel that may be needed to fly those last few passengers.
Markets decide the demand and supply of goods and hence, their
prices. In a market economy, the decision-making is in the hand
Principle 4: Trade can Make Everyone Better Off of millions of buyers and sellers. It is a fact that the government
The result of trading carried out between countries, households is the central planning authority in a communist economy, and as
and people is called Specialization and Competition. Japanese and such, it may not be able to take the best decisions for every buyer
Americans produce the same type of goods, such as cars. They and seller. In a market economy, individuals decide regarding which
have healthy competition between them to produce better cars jobs they would take up and what they will buy with their income.
to attract people and establish themselves as trustworthy and
consumer-oriented companies.
Principle 6: Market Outcomes can Occasionally be Principle 7: A Country’s Living Standard is Dependent on
Improved by Governments its Capability to Produce Goods and Services
According to this principle, if the invisible hand of market forces High productivity in an economy is depicted by a high standard of
had been perfect, there would have been no need for a government. living. Higher productivity ensures higher living standards. Laws
The government is required in order to form and enforce rules. The for minimum wages and labour unions do not provide for a higher
working of market forces is based on the imposition of rules by standard of living. Policymakers can ensure a better living standard
the government. It is also based on how the government maintains by raising productivity, which is dependent on skill development and
the related organizations and institutions that are essential for the thus, the efficiency of the workers. Policymakers can also provide
functioning of a market economy. access to the best technology to their workers.
Principle 8: If the Government Prints Excess Currency, Three Economists and Their Theories
Prices will Rise
Inflation is a phenomenon characterized by an incessant and The most influential economic theories were developed by three of
persistent increase in prices in the whole economy. The purchasing the most important economists and highly original thinkers - Adam
power falls whenever inflation rises, thereby affecting the demand. Smith, John Maynard Keynes and Karl Marx. These theories have
Inflation can be caused due to the excess supply of currency by the affected the world’s economies for generations.
government.
Adam Smith: Theory of the Invisible Hand of Capitalism
High inflation means everything costs more, putting pressure on
the market forces and the economy. Hence, economists generally Adam Smith (1723–1790) is also referred to as the Father of
want to keep the inflation low. Economics. His book “The Wealth of Nations” was published
in 1776. He founded modern economics and classical
economics.
Karl Marx (1818 to 1883) was a German John Maynard Keynes (1883 to 1946) was a British economist. He
economist. He was of the view that when all the examined capitalism closely.
resources of production have been set up by
the capitalist, all the value created by labour is His argument was that the overall level of economic activity is
involved in the production of commodities for determined by aggregate demand and if the aggregate demand is
capital accumulation of the capitalists. inadequate, it could result in higher unemployment for extended
periods.
This chapter acquaints us with economists such as Adam Smith, Karl Marx and Lord Keynes
who are widely recognized for their work.