Economics theory

Classical Economics
Key Concepts:
• Invisible Hand: Adam Smith's concept suggesting that
individuals, acting in their own self-interest within
competitive markets, unintentionally promote the
general welfare of society.
• Free Markets: Emphasis on minimal government
intervention in economic affairs, allowing market
forces to determine prices, production, and
distribution.
• Division of Labor: Specialization of tasks within an
economy, leading to increased productivity and
efficiency.
 Classical Economics
Key Concepts:
• Comparative Advantage: Ricardo's theory stating that
countries should specialize in producing goods and
services where they have a lower opportunity cost
relative to other countries.

Emphasis: Classical economists believed that free

markets, driven by self-interest and competition, would
naturally lead to optimal resource allocation and
economic growth. They emphasized the importance of
laissez-faire policies and argued against government
interference in the economy, viewing it as potentially
distorting market signals.
 Keynesian Economics
• Key Figures: John Maynard Keynes.

Key Concepts:
• Aggregate Demand: Total demand for goods and
services in an economy.
• Fiscal Policy: Government manipulation of taxation
and spending to influence economic activity.
• Liquidity Preference: Keynes's theory that individuals
prefer to hold wealth in the form of liquid assets
(cash) rather than non-liquid assets.
• Animal Spirits: Non-rational factors influencing
economic decisions, such as confidence and
optimism.
 Keynesian Economics
• Emphasis: Keynesian economics emerged in response
to the Great Depression, advocating for active
government intervention to stabilize the economy.
Keynesians argue that market economies can
experience prolonged periods of unemployment and
underutilization of resources, which can be corrected
through fiscal and monetary policies to stimulate
demand.
 Neoclassical Economics
• Key Figures: Alfred Marshall, Leon Walras, Milton
Friedman.

Key Concepts
• Marginal Utility: The additional satisfaction or benefit
derived from consuming one more unit of a good or
service.
• Equilibrium: A state where supply equals demand,
leading to stable prices and quantities in markets.
• Rational Choice: Assumption that individuals make
decisions to maximize their utility or satisfaction,
given their preferences and constraints.
• Market Efficiency: The notion that markets efficiently
allocate resources to their highest-valued uses.
 Neoclassical Economics
• Emphasis: Neoclassical economics builds on classical
economic principles but incorporates mathematical
modeling and a focus on individual decision-making. It
emphasizes the importance of rational behavior,
market equilibrium, and efficient resource allocation
through price signals. Neoclassical economists often
advocate for policies that enhance market
competition and reduce government intervention.
 Behavioral Economics
• Key Figures: Daniel Kahneman, Amos Tversky, Richard
Thaler.

Key Concepts
• Cognitive Biases: Systematic deviations from rational
decision-making due to mental shortcuts or
heuristics.
• Bounded Rationality: The idea that individuals have
limited cognitive resources and cannot always make
fully rational decisions.
• Prospect Theory: Kahneman and Tversky's theory that
individuals' decisions are influenced by the potential
gains and losses relative to a reference point.
 Behavioral Economics
Key Concepts
• Nudge Theory: Thaler's concept of designing choice
architectures to influence behavior without restricting
options.

• Emphasis: Behavioral economics challenges the

classical assumption of perfect rationality and
explores how cognitive biases and emotional factors
affect economic decisions. It seeks to understand why
individuals often deviate from standard economic
models and proposes policy interventions to help
people make better choices.