SIBBALUCA, AIRA MAE C.

BSAIS - 2A
MANAGERIAL ECONOMICS - ASSIGNMENT

Give three (3) economic theorists and their respective theories in economics.

1. Keynesian Economics Theory

Keynesian economics, an economic theory developed by the British theorist John
Maynard Keynes in the 1930s, emphasizes the role of government intervention in stabilizing the
economy. During the Great Depression, Keynes proposed that when the economy is struggling,
the government should increase spending and lower taxes. This approach is aimed at
encouraging people to spend more, thereby improving the overall economic situation. In
contrast to the idea that the economy would naturally recover on its own, Keynes argued for
active government intervention to address issues like unemployment and foster economic
growth. Despite its significance, there are ongoing debates about the extent of government
involvement and its effectiveness in helping the economy. Overall, this economic theory has
significantly shaped how people perceive the government's role in managing economic
challenges. In essence, Keynesian economics suggests that the government should play an active
role in navigating the fluctuations of the economy by adjusting its spending and tax policies.

2. Monetarism Theory
Monetarism as a formal economic theory began to take shape in the mid-20th century,
notably associated with economist Milton Friedman. While its roots can be traced back to
earlier ideas in monetary theory, Friedman's work in the 1950s and 1960s significantly
contributed to its development and popularization. It is a theory stating that the amount of
money in an economy affects prices. If there's too much money, prices might rise (inflation), and
if there's too little, prices could fall (deflation). It emphasizes the importance of controlling the
growth of the money supply to prevent inflation or deflation. Monetarists advocate for a clear
plan by the central bank on how much money to add to the economy, emphasizing the need for
steady and predictable money supply growth. They believe this approach is more effective than
adjusting government spending or taxes. Monetarism underscores the significance of managing
the money supply to control inflation and stabilize the economy, with a preference for a rule-
based approach to monetary policy. This perspective has influenced central banking practices
and discussions on the role of monetary and fiscal policies in economic management. Overall,
monetarism highlights the central role of managing the money supply to maintain economic
stability and avoid price fluctuations.

3. Invisible Hand Theory

Adam Smith's introduced the concept of the "invisible hand" in his seminal work, "The
Wealth of Nations," published in 1776. According to Smith, when individuals seek to maximize
their own profits or well-being through voluntary transactions in markets, they are guided by an
"invisible hand" that coordinates their actions to achieve the most efficient allocation of
resources and the greatest overall prosperity. It is like saying that when people do what's best
for themselves, it can end up being good for everyone. Smith thought that if people are free to
make their choices in markets, it can create a positive outcome for society without needing a lot
of government rules. In simple terms, the invisible hand theory implies that when individuals
pursue their self-interest in a free-market system, it inadvertently benefits everyone by
encouraging competition, fostering innovation, and efficiently allocating resources. This idea has
significantly influenced classical economic thinking and remains a subject of ongoing discussion
in relation to market dynamics and government policies.