Economic (Keynesian Economics) - Assignment Example

Economics Table of Contents Answer to Question One 3 Answer to Question Two 5 Answer to Question Three 7 References 9 Answer to Question One According to perceptions in the Keynesian economics, the state or the government is an important part of an economy through which optimistic activities can enhance any adverse situation within an economy. John Maynard Keynes proved as to how an economy can sustain its adverse position of unemployment along with high inflation without intervention of the government.

The reason for which government uses this theory of Keynes for improving economic performance is the power of controlling supply of money within an economy. The government, following the Keynesian economics does not wait for the market forces to act in order to settle the adversities within an economy in terms of enhancing GDP (Gross Domestic Product) and reducing unemployment. Instead, the government backs up the economic condition through the utilization of its capacity of making changes in the rates of interests and transaction of bonds issued by it within the market, i.e. through buying them back or through selling.

Following this economics, the government aims to act as an interventionist (Pressman, 2001). At this point, the question arises as to how the government utilizes its weapons of controlling money supply for improving economic performance. With regard to this, the government has three factors for manipulating in order to reform the economy: aggregate demand, savings and unemployment. Aggregate demand is that economic factor which is often considered as the GDP. Investment, consumption, net exports and government spending are the variables of this aggregate demand.

If any of these components decrease, the government increases any other component for keeping the GDP same. Government can decrease the rate of interests for de-motivating the savings perspectives of the individuals and thus can save the GDP to fall considerably due to excessive saving within the economy. Government can induce demand for goods and services for motivating the business houses to build up new factories or can itself spend more on building up capacities of production. These will result in multiplication of the spending of government as a result of more employment within the business houses.

For example, during the 2008 global financial crisis, the US government enhanced its spending through acquiring high amount of equity in the American International Group with the aim of inducing prospect for investing among the individuals in a financial institution which is majorly owned by the government (Amon, 2010). Answer to Question Two Capitalism is that form of the economy where most of the possessions are owed by the private sectors. Practically, there cannot be any perfect existence of capitalism as this is inclusive of certain forms of intervention from the government for protecting the property which are privately owned and at the same time make certain regulations within the economy.

Principally, there are three important advantages of capitalism. The first one is the efficient resource allocation along with production efficiencies. Capitalism, often termed as the “invisible hand of the market”, makes certain that the resources of a country are proportionately distributed within the market according to the level of preferences of the consumers. In terms of productivity, capitalism aspects of the economy direct the firms to cut costs for enhancing level of competition and also productivity for sustaining in the competitive market.

The second advantage of capitalism is that it creates dynamism within the market. This happens because the firms, under this system are required to counter aggressively to changing preferences of the consumers for adhering to their trends. Thus, capitalism enhances market dynamism. The third and perhaps the most important advantage of capitalism is the inclusion of financial incentives that induces the feeling of developing businesses among the entrepreneurs. Capitalism provides scope of earning profit among the private firms.

For example, in a capitalist economic system, the entrepreneurs are motivated for taking risks in order to gain huge rewards in terms of finance (Bishop, 2000). Considering the lists of disadvantages of capitalism in an economic system, the most important is the prevalence of unreasonable actions of the private players within the economy. A prominent example of this fact is the irrational creation of credit from the Lehman Brothers that gradually led to the massive economic failure. Capitalism that induces free market permits the firms to acquire the power of monopoly as a result of which consumer exploitation occurs within the market.

For example, during the 19th century, due to accumulation of monopoly power, the American Railroads exploited the people through charging enhanced prices. Lastly, the assumption that in a capitalist economy, there is existence of mobility is actually an impractical assumption. For example, a man who loses his job as a farmer cannot easily go to a city and acquire a job in any other industry without learning the technicalities of other jobs (Mostert & Et. Al., 2004). Answer to Question Three When a large firm competes with a smaller firm, gradually the conditions of monopoly occur within the economy.

Again, it is due to the advantages that the larger firm would receive as a result of monopoly, the consumers can also obtain benefit from this holding of power of the large firm. The advantage due to lower cost for the large firms is due to the benefits of economies of scale that they enjoy. Economies of scale provide the scope of charging low prices of products and services from the consumers. . Source: (Baumol & Blinder, 2007) In the above figure, the impact of economies of scale has been depicted.

Since the larger firms will be able to provide goods and services on a large scale within the market, hence they are likely to hold a better position of enjoying benefits of economies of scale than the smaller firms. Thus, this will create decrement in the production costs on an average. As a result of this, profits will increase but certain portion of this production efficiency will also move on to the consumers who will enjoy less prices of products and services (Baumol & Blinder, 2007). For example, car manufacturing and airline firms generally enjoy the economies of scale, the benefit of which is at times visible in the form of lower airfares and various discounting offers in airline and car manufacturing industries respectively.

The achievement of economies of scale by the large firms allows them to hold greater market power than that of the smaller ones. The benefits of lower cost and high market power of the larger firms are also evident in terms of research and development prospects of those firms. Consumers benefit from such firms’ activities in the long run. For example, the oil companies which are investing in finding new and innovative sources of oil through investment in their R&D department will benefit the consumers in the long run (McKenzie & Lee, 2008).

References Amon, A., 2010. Perspectives on Keynesian Economics. Springer. Baumol, W. J. & Blinder, A. S., 2007. Microeconomics: Principles and Policy. Cengage Learning. Bishop, J. D., 2000. Ethics and Capitalism. University of Toronto Press. McKenzie, R. B. & Lee, D. R., 2008. In Defense of Monopoly: How Market Power Fosters Creative Production. University of Michigan Press. Mostert, J. W. & Et. Al., 2004. Microeconomics: A Southern African Perspective. Juta and Company Ltd. Pressman, S., 2001.

A New Guide to Post Keynesian Economics; Contemporary Political Economy Series. Routledge.