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Managerial Economics
MSL 780

Outline
Lecture 1: Circular flow of the economy
Today’s topic
• What is an economy?
• How do economists conceptualise an economy?
• How do economists approach the study of an
economy?
• How do economists see its functioning and the
results of this functioning?
What is an Economy
• An economy is an integrated system of production,
distribution and consumption of goods and services.
• We need to consume to live, and produce in order to consume.
• Production is usually organized in a cooperative manner –
different producers producing different products and many
producing the same product in competition with one another.
• What is produced is then distributed for the purposes of
consumption or as inputs into the reproduction of the
commodities.
• It is agreed that a capitalist economy is one in which
property is fundamentally private, products are produced
by firms to be sold for money, and there is competition
between entrepreneurs/capitalists seeking to maximise
their earnings from the sale of their products.
Differences among the
Economists
Approach- comparative:
Differences among Economists
• There are differences between economists
regarding how to conceptualise the capitalist
economy, approach the analysis of its workings, and
explain the phenomena pertaining to its working.
• Major groupings;
• Neoclassical = Orthodoxy
• Heterodox = Alternative
1. Neoclassicals
Who are they?
• Emergence: around the middle to late 19th century
• Sub groupings; New Classicals, Walrasians, Austrians,
New Keynesians etc.
• Journals; Journal of Political Economy, Economic
Journal, American Economic Journal, Oxford Economic
Papers, Econometrica, etc.
• International Institutions; IMF, World Bank, WTO.
• Individuals; Jevons, Menger, Walras, Marshall, Hicks,
Samuelson, Friedman, Lucas, Stiglitz, North.
• Most winners of the ‘Nobel Prize’ in economics
Conceptualising an economy
• Individuals as consumers and suppliers of factor
services, and firms as producers and buyers of factor
services.
• Factor inputs are seen as including capital, labour and
land services, with prices of these seen as the (real)
incomes accruing to these factors.
• Capital is a certain sum of commodities saved by
individuals and lent to other individuals for interest or
additional quantities of commodities.
• Private property, markets, competition between firms
and international integration
Explaining an economy
• Neoclassicals explain economic phenomena in
terms of utility maximising individuals.
• A distinction is drawn between Macro and Micro.
• A distinction is drawn between real and monetary
phenomena, with explanations of these in terms of
real and monetary factors, respectively
• Importance is attached to the notion of markets
tending towards equilibrium
Neoclassicals: Key ideas
• Basic contention – private property and a
competitive, free market system give rise to;
• Welfare maximisation, least cost production and
distributive justice
• High and stable economic growth, no unemployment,
no inflation and no balance of payments problem
• Fluctuations in economic growth around long-term
trends are the result of shocks – real or monetary
• State should not intervene in the economy
Problems with conceptualisation
• No profit
• Cannot conceptualise capital in a way that permits
the explanation of the income appropriated by
owners of capital
• Individuals not the only buyers of commodities in
product markets – also firms

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Problems with approach
• Mistaken understanding of markets
• Prices not determined in markets
• No such thing as a market for capital as a factor of
production
• Assumption of equilibrium leads to a mistaken
understanding of the cyclical nature of the system –
cycles are seen as random events

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Problems with explaining
phenomena
• The capitalist economic system is not about making
everyone happier but about the accumulation of
wealth
• Inequality, unemployment, debt, etc are normal
aspects of its workings
• The system is not inherently stable – it is cyclical
• The state always plays an important role in the
functioning of the system
2. Heterodox
Who are they?
• Emergence; Post World War II (except for Marxists)
• Sub-groupings; Post Keynesians, neo-Ricardians,
Sraffians, and Marxists
• Academic journals: Review of Radical Political Economy,
Capital and Class, Real World Economics Review, World
Review of Political Economy, Economy and Society, and
International Journal of Political Economy
• Institutions: UNDP, South-South, etc.
• Individuals: Post Keynesians include Davidson, Chick,
Kaldor, and Dow. Marxists include Fine, Shaikh, Foley,
and Harvey
Conceptualising an economy
• Individuals and firms are seen as buyers of goods, with the
goods being sold for money by firms with a view to
recovering the costs of producing these and a profit.
• Factor inputs are seen as capital, labour and land, but
incomes accruing to owners of these are not seen as
determined in factor markets.
• Firms are seen as owned by entrepreneurs who appropriate
a certain rate of profit in relation to the quantity of money
advanced as capital in the process of production.
• Firms purchase inputs with their own and borrowed money capital
• The economy being analysed is one conceptualized by
private property, markets and competition between firms as
well as power relations between classes
Explaining an economy
• The basis for the explanation of economic phenomena is the
profit-seeking firm.
• An understanding of the process of production is seen as
providing the necessary foundations for understanding the
economic system.
• The prices of commodities and incomes accruing to factors are
explained on the basis of production and not markets.
• No distinction is made between micro and macro economics.
• There is no distinction between real and monetary
phenomena as being explained by real and monetary variables
• The tendencies are both towards and away from balance in
markets.
Explaining an economic
phenomena
• The capitalist system results in a rapid development
of technology and rises in living standards, but
• Mostly benefits the owners of capital
• Is inherently and necessarily unstable - growth,
unemployment, inflation, etc. are inherently and
necessarily cyclical
• The State plays an important role in the economy
Heterodox: Key ideas
• Private property and the market system can and do yield
improvements in living standards
• Profit is the driver of the system
• Inequality (and unequal access to assets) is necessary for the system
• Markets do not function in the manner hypothesized by
Neoclassicals/NKs
• Growth is necessarily unstable, periodic unemployment is
unavoidable and functional, as is inflation
• The economic system is characterized by recurrent cycles (not
random fluctuations) in economic growth etc.
• The state is a capitalist state and represents the broad interests of
capital as well as, at times, particular sections of capital
• Dominant economic theories reflect the interests of different
sections of the capitalist class
Business cycles
Next session
• Neoclassical product market
• Mankiw, G.N. (2017) Principles of Microeconomics,
8th edition (Cengage Learning).
• Chapter 1: Ten Principles of Economics
• Chapter 2: Thinking Like an Economist
• Chapter 4: The Market Forces of Supply and Demand