Microeconomics report

SRI LANKA INSTITUTE OF INFORMATION TECHNOLOGY – FACULTY OF BUSINESS

Nadishan G.S.W.Y. | Samaratunga Y.A.M.S. | Nawarathna N.M.D. | Wijesooriya W.A.D.I.

BM101 – Microeconomics

GROPUP ASSIGNMENT

(REPORT)

SLIIT – Faculty of Business

Department of Business Management

BBA Special (Hons) Degree/ BBA (Honours) in Business Management

Year: One Semester: One


Nadishan G.S.W.Y. | Samaratunga Y.A.M.S. | Nawarathna N.M.D. | Wijesooriya W.A.D.I. Page 1

Faculty of Business

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Student ID Student Name Signature Contribution %

BM16432376 Nadishan G.S.W.Y. 25%

BM16428034 Samaratunga Y.A.M.S. 25%

BM16429024 Nawarathna N.M.D. 25%

BM16430532 Wijesooriya W.A.D.I. 25%



Table of Contents

1. Introduction…………………………………4

2. Physiocrat…………………………………...5

3. Mercantilism………………………………..6

4. Classical economics………………………...7

5. Keynesian economics……………………….8

6. Neo-classical economics……………………9

7. New classical economics………………….10

8. New Keynesian economics………………..11

9. Structural economics………………………12

10. Institutional economics…………………..13

11. Conclusion……………………………….14

12. References………………………………15



1.Introduction

The evolution theory is basically depending on the economic activities. In this report we

mainly forces about the massive economic evolution in human history. So that we hope to

study economic growth, economic recession, income distribution, agricultural economics and

new trends and contemporary issues of economics. Because of the economic evolution people

are moving from the pre-history to civilization by using new technology clever textile men

created machines and equipment. In this report we discover an evolution theory of the

Physiocrat, Mercantilism, Classical economics, Keynesian economics, Neo-classical

economics, New classical economics, New Keynesian economics, Structural economics,

Institutional economics. We try to prepare this report as a group and work together. We will

be trying to discover about this topics deeply.



2.Physiocrat

Physiocracy theory was developed in 18th century by a group of French

economists those who believe that ‘land’ has the highest importance over any other factor of

products. Furthermore they said wealth of the nation can be measured by its’ value of the

land, agriculture and development. This theory was more influenced in the late medieval

period where nobility and land lord played major roles in an economic as production agents

as well as they took priority over merchant class. In this time period there were three main

social classes formed and each class had various contributions to the economy. Proprietary

class is the class which land owners belong. Agricultural labors’ class was named as

productive class. Sterile is the class where artisans and merchants were declared. Productive

class had the authority to control the money flow by controlling productive primary

resources.

Furthermore this theory says more important to pay attention to productivity

as the source of national wealth. Idea of capital flow is another important idea which was

improved by physiocrats. Farmers needed some capital to invest on them to start the

production process and this concept was introduced by two economists known as Quesnay

and Turgot. These two economics emphasized that farmers required capital to purchase

equipment, land and labor. With these concepts they have realized but that there was another

important thing that capital investment and risk had clear relationship.

Physiocracy is a theory which concern about agricultural productivity. After

some time overpopulation came to play and there were only certain amount of highest

productive agricultural land remained and that caused famine and poor economic outcomes

for the country. “Physiocracy is a concept which is based on natural environmental

resources.”



3.Mercantilism

Mercantilism theory is related to promoted governmental regulations of a

nation’s economy for the purpose of augmenting state power of the expense of rival national

powers. This theory was implemented in 16th to 18th centuries in modernize parts of Europe.

This concept has become very popular among Asian countries in 20 th century. Commercial

revolution can be considered as the base of this theory.

Commercial revolution affected in economies in various changes such as

transition from local economies to national economies, from feudalism to capitalism, from

rudimentary trade to a larger international trade. During 16th 17th and 18th centuries this

concept was only popular among major trading nations based on national wealth and power.

Those countries in Western Europe such as Holland, France, United Kingdom, Belgium,

Portugal and Spain to increase their exports and collect precious metals in return. The

monarch ruled everything and their policy was to export to countries under their control and

not to import.

International trade can be considered as another concept which formed

with Mercantilism. International trade was encouraged by geographical diversity as well as

flow of gold and silver. In this time period state has become the governing body of an

economy and state was able to control the economy through corporations and trading

companies. In this situation each state very concerned about the quality of their goods as well

as to minimize their production cost in order to protect their place in the world market.

Furthermore this theory emphasizes that the world has limited as well as

constant amount of wealth and to achieve higher economical stability that each country has to

either obtain resources from another country or maintain favorable import/export ratio.

Mercantilism is theory which states wealth of a country can be increased by exporting more

and importing less and receives more gold.



4.Classical economics

Classical economy theory states that government has to minimize their

interferences to the market economy. Furthermore this theory emphasizes that minimal

government helps for a better market functions. This theory was developed in late 18 th

century and early 19th century by Adam Smith, Jean-Baptiste Say, David Richardo, Thomas

Malthes and Jhon Stuart Mill.

Adam Smith said that market is not the ideal place to distribute the public

goods. Classical economics say that consumers and suppliers should freely meet even though

Adam Smith showed the danger of forming monopoly in the market and to overcome that

competition among suppliers is very important fact. Classical economy concept emphasizes

that flexibility of both prices of goods as well as wages can help market to ensure

equilibrium.

Classical economists blames that some government activities such as tax

charging, debt cancellation. Individual shall work on motivation of his or her income.

Individual income depends on their property right to land and capital that they possess.

Therefore national income can be divided among labors, land holders, capitalists. This theory

says government has to minimize activities on free market and should let individuals to take

decisions since they are also earning by providing factors of production. So the production in

the market can purchase by individuals and government interferences may cause equilibrium

to settle in an artificial place. Minimum government influences as well as free purchasing

decisions as well as effective competition in the market shall ensure better market.

.



5.Keynesian economics

Keynesian economics describes in short run how economic output is

strongly influenced by total demand and especially in conditions like recessions. In 1930

British economist Jhon Maynard Keynse introduced this theory to overcome great

economical depression which occurred in that time.

Jhon Maynard Keynse wanted to consolidate the collapsed economy and he

saw that everyone who wants a job shall flexible with their wages and free market will satisfy

full employment. Keynes further emphasized that the free market might not be able to satisfy

full employment because it does not have any self-balancing force. Hence an economy needs

government to involve in certain activities to achieve full employment. Keynse showed that

insufficient total demand may cause high unemployment for a longer period of time.

In an economy the total output is equal to the sum of consumptions, invest-

ments, government purchasing and net exports. The total demand can increase only by one or

more above mentioned components. But in a condition like economic downturn discourages

consumers to spend money and that may cause reduction in total demand. In such condition

business are not convinced to invest money and firms also demoralize because the demand on

their products is significantly reduced. In situations like that government has to play a crucial

role to increase the total output as well as to keep the business cycle in a better manner.

Furthermore Keynesian economic concept explains that in a mixed economy

privet sector as well as government sector has vital roles. To consolidate an economy which

is face recession; government has greater responsibility when free market is failed to ensure

full employment. Government has to make some policy decision in order to achieve full

employment as well as to increase the total economical outcome.



6.Neo-classical economics

Neo classical economics was developed by Adam Smith in the 18th century.

Neo classical economics is a collection of solution to economic facing on the determination

of outputs, goods and income distribution in the economy. It suggests that because the

consumer’s goal is to achieve utility maximization. The organization’s goal is to achieve

profit maximization. This theory emphasizes that these goals are always fighting to achieve

their targets. Finally market forces control the customer easily.

Most important idea of the neoclassical theory is that consumers often

perceive good as being more valuable than the production cost, thus affecting both demand

and price for the product. Another idea of neoclassical theory is that economic decisions are

often made based on margins or the perceived likelihood that an economic option will turn

out to be profitable beneficial in the future.

Today, the Neo classical theory is the most widely used economic theory.

The theory was built by classical theorists Adam Smith and David Ricardo through the

works of economists William Stanley, Carl Mengers and Leon Walras the theory’s origins

back to the 1870’s. These economists focused on how the perceived usefulness of goods

affected market forces. Neo classical economics largely become a study in microeconomics

since utility is determined at the consumer level.

In 1933, Joan Robinson and Edward H. Chamberlin expanded the theory.

They express how consumers and business continue to complete when some have an unfair

advantage over others such as in a monopoly by including the idea of “imperfect competition.



7.New classical economics

New classical economics helps to make macro-economic analysis based on

micro economics. New classical economics was invented by Lucas and Leonard Rapping's

when they were attempting to provide micro foundation for Keynesian labor market.

Lucas and Leonard Rapping's showed that market economy will establish

equilibrium when total supply is equal to total demand. If supply of labor exceeds their

demand such condition may cause unemployment. In conditions like rescission total demand

on goods and services decreases and firms are demoralized to pay high wages for their

employees. In such condition unemployment can formed. The classical economists showed

that economy is only efficient when mutual adjustment of supply and demand occurred. Any

market imperfection can cause unemployment and government can eliminate market

imperfection through their involvements.

According to Kayne's when rescission occurs and that may cause total

demand to fall due significant reduction of private investments. Firms will produce less than

their capacity and they no longer need more employees. Firms will pay lower wages to their

employees in order to maximize their profit.

In New classical economics there are two concepts; the first one is

individuals are considered as optimizers. They choose the best available option based on

prices, wages and their education level. On the other hand firms main objective is to

maximize their profit and people want to maximize their utility. Second one is according to

that prices may adjust accordingly and individuals may change their choices resulting to align

demand and supply. The new classical economics changed the technical base of modern

macroeconomics.



8.New Keynesian economics

.

John Maynard Kayne's invented the general theory of Keynesian economics in

1930. After few decades new classical economists such as Robert Lucas, Thomas J. Sargent

and Robert Barre questioned precepts of Keynesian theory. In 1980 the new Keynesian

theory was introduced to respond to those discriminative ideas with some amendments to the

origin Keynesian theory.

The major conflict between new classical and new Keynesian economists in

over how promptly wages and prices adjust. New classical economists assumed that wages

and prices are flexible. Further they believe that price has the capability to clear the market

and adjust the demand and supply promptly. However New Keynesian economists said that

market clearing models cannot describe in short run economic fluctuations. So that they

emphasized wages and prices are sticky. New Keynesian economic theories based on this

stickiness of wages and prices to describe why involuntary unemployment occur and why

monetary policy has such a significant influence on economic activities.

The New Keynesian economists said that monetary policy has strong effects

on employment and production in short run because prices respond slowly to change changes

in the money supply. According to this if the monetary supply falls people will not spend

more money on goods n services and that may cause total demand to fall. Since prices and

wages sticky these facts will not fall immediately, but reduced total demand (spending)

causes firms to produce less and as a result of that laying off can happen. Even though new

classical economists challenged because lacks of coherent theoretical explanation for the

sluggish behavior of prices. Much new Keynesian researches has introduced to overcome

those contradict ideas.



9.Structural economics

Structural economics emphasizes the important of taking into account

structural features when understanding economic analysis. It is a theory and method that

relate changes in technology and lifestyles. It helps to solve some of the most challenging

questions of our time. The approach begins with the work of the economic commission for

Latin America.

Structural economics have shown the importance of institutions and

distributions across both productive sectors and social groups. This theory has been

developed by Lewis Model, between the 1960’s and 1970’s.Those are known as the two

sectors model the surplus labor model. It focused on the need for countries to change their

structures, away from agriculture, with low productivity of labor , towards industrial activity

with labor’s high productivity.

The version of this model has three commodity markets (food, manufactures

and capital), foreign trade and income distribution. Income distribution underpins the

specification of a financial sector with savings, fiscal, investment and monetary balances. If

we consider about the structural change, it can alter past trends of theories regarding stock

returns structural change is an economic condition that affect for industry or market changes.

This can be represented by significant changes in time series data by shifting the parameters

of an entity.

By understanding the structural economics, people can get a idea about the

nature of economic development. This theory helps to middle-income countries achieving

dynamic growth and eliminating poverty.



10.Institutional economics

Institutional economics based on understanding the role of the evolutionary

process and the role of institutions in shaping economic behavior. Institutional economics

emphasized a larger study of institutions and choose market as a result of these individuals,

firms, states, social norms. Institutional economics was announced by Walton Hamilton at a

meeting of the American Economic Association in 1918. Hamilton declared “It is not the

plays of economic pass judgment upon practical proposals.”

Institutional economics recognized that “The proper subject-matter of economic

theory is institution….. Economic theory is concerned with matter of process…. Economic

theory most is based upon and acceptable theory of human behavior….” American economist

Thorstein Veblen laid the foundation for in institutional economics with his traditional static

economic theory. He tried to replace the concept of economic decisions with the idea that

idea continually affected by changing customs and institutions. Veblen saw the primary

motive of the American economics system as pecuniary rather than technological business

enterprise.

Understanding role of institutions in economic growth is very important. It is

devoted to the study of the nature, role and evolution of institutions in the economy



11.Conclusion We as a group of students studied several important topics of economics. Economics is a vast

subject and it has updated and upgraded in time to time in order to predict market behavior as

well as to study it in more precise manner. Economics is a subject which is based on those

theories and assumptions, but when there's a problem occurred in an existing theory a

modernized theory comes to play in order to eliminates pervious theory's confusing.

Ultimately we've learnt that economics is a subject which is subject to changes and

modifications as well as it always simplify very complex economical problems through

projections and theories, helps policy makers to manage the economy in an efficient way.



12.References

1. Economics Encyclopedia [economicsencyclopedia.com]

2. Inside Economics [insideeconomics.com]

3. International Relations Vol. II

4. Britannica.com [Britannica/economics.com]

5. Wikipedia.com

6. Classical School of Economics (1776-1871) An Outline

7. The Concise Encyclopedia of Economics

8. PANOECONOMICUS, 2006, 1, str. 5-18

9. Google.scholor.com/YouTube.com/Dailymotion.co

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