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Essential Principles of Economics - Essay Example

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Essential Principles of Economics

This work helped in creating the modern academic discipline of economics and provided one of the best-known intellectual rationales for free trade, capitalism, and libertarianism. But there are critics like Murray N. Rothbard who've propounded that "Adam Smith perverted the development of sound economic analysis by failing to advance valid extant theories of value, money, and income distribution". As a matter of fact Modern economics pretty much continues along Smith's line of analysis, which says that, 'a nation and the people do well when the economy does well, and when the economy is in crisis or doesn't do well, the nation suffers and so do the people as they don't always get the goods and services they need.' Economics in general may be divided into;
Microeconomics: Defined at the level of individual choices. This branch of economics is mainly concerned with the decisions made by individual consumers, households, and firms and how these decisions interact with each other to form the prices of goods and services and the factors of production. This is basically a bottom up approach where looking at the smaller picture individual's relationship to the economy remains the focus area.
Macroeconomics: Defined at the level of aggregate results in which we study the national income, employment, interest rates, goods and services produced, total income earned, exchange rates, prices etc. In this study national economy is studied and compared with global economics. Macroeconomics can be used to analyze how best to influence policy decisions and goals like economic growth, price stability, full employment and the attainment of a sustainable balance of payments.

Economics can also be divided in positive (descriptive) and normative. This is an idea we owe to the great conservative social philosopher and economic theorist and statistician, Milton Friedman. According to Friedman;
Positive economics has to do with "what is," aspect. Economics is considered as a social science and such is subject to the same kind of checks which are based on the evidence like any science. By a science we mean that our work is positive rather than normative. Science is characterized by its methodology. Unlike the applied sciences the social sciences are known as a loose grouping of subjects. What they have in common are that they study the behaviour of humans.
Normative economics deals with "what ought to be." In contrast to positive economics, normative economics takes into consideration moral or ethical aspects. It goes beyond the limit of science.

Another great economist, Thomas Robert Malthus postulated the hypotheses that unchecked population growth always exceeds the growth of means of subsistence. Actual (i.e. checked) population growth is kept in line with food supply growth by "positive checks" (e.g. starvation, disease and the like, elevating the death rate) and "preventive checks" (i.e. postponement of marriage, etc. that keeps down the birthrate). Malthus's hypothesis implied that actual population always has a tendency to push above the food supply. Because of this tendency, any attempt to ameliorate the condition of the lower classes by increasing their incomes or improving agricultural productivity would be fruitless, as the extra means of subsistence would be completely absorbed by an induced boost in population.

In his much-expanded and revised ...Show more


Adam Smith defined Economics as science of wealth. Economists define wealth as one that has "Value in use" and "Value in exchange". Economics is the study of how wants are satisfied and decisions made when faced with limited resources. The study of economics is concerned with how people get the goods and services they need and want…
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