The Five Theories of Economics

An economy is a place of exchange, production and distribution, and also consumption and exchange of goods and services among different producers, agents and consumers. In simple terms, it is understood ‘as a socio-economic domain where the practices, discourses, material expressions and practices related to the production, management and use of productive assets are characterized by different forms of interaction’. In simpler economic terms, economy refers to the techniques and procedures by which value is created and the value is made possible for a society or a group of people at the market place. The process of economy involves principles and truths that govern how people manage to create value and how they ensure its sustainability.

The underlying principle of economics is the law of demand and supply. The demand principle is basically a human characteristic that dictates that what satisfies the appetite of a consumer should be provided by everybody else. The basic economic principle of demand is ‘the less you earn the more you need to consume.’ This principle is expressed in economics in the statement, ‘the demand for commodities is determined by the rate at which they are bought and the rate at which they are sold’. Under normal market conditions, when a product has been manufactured and put into circulation; the need to buy it immediately stops other people from hoarding it and prolonging the supply. When the demand for commodities increases, everybody benefits from it, including no other human being apart from the one who has produced it.

The second fundamental principle of economics is called efficiency. The efficient or successful economy is one that provides goods and services at a reasonable rate so as to maintain the level of income at the individuals who receive them. In other words, economies maintain their level of output while removing the waste or unneeded items from them. This principle is the basis of most modern economic policies and, to implement them successfully, an economy needs the largest number of consumers (its consumers) as possible.

The third economic principle is called abundance. The economic policy of abundance holds that the size of the market is not the only determining factor as to whether a country’s economy grows or remains stagnant or remains bankrupt. For any economy to function properly, its scarce resources (money), both fixed and movable, must be allocated between the many different buyers and sellers who make up the economy. If too much of one kind of scarce resource is taken by one group and not enough is made available by another, the result is either a decline in the aggregate quantity demanded or an excess production of some sort.

The fourth economic principle is called political economy. It is the study of how different political institutions affect the volume and quality of goods produced by the economy. For instance, if the political regime puts a high premium on oil then the prices of oil will be high and consequently, goods produced by the economy will tend to be of inferior quality. On the other hand, if the political government discourages the use of oil, the prices of oil will decrease and this would lead to a reduction in the quality of goods. Political economy is therefore a branch of economics that has as its central goal the study of how various political institutions affect the macroeconomic structure of a nation.

The fifth theory of economics is called pure market economy. Under this school, the only thing left in society after everything else has been eliminated is the production of basic human needs such as food, shelter and clothing. Production in pure market economies occurs without regard for how much of these needs may be productive in relation to others. Pure market economies exist until something is done about them, but they tend to remain self-sufficient.

As you can see, all five of these theories of economics deal with a different way of organizing the economy. All were first outlined in the economic writings of classical economists like Walras, Solon, Pigou, Vebenik and Frises. These writers came from a culture that believed that economics should have broad social impacts on society. As a result, many people today believe that classical economics is a valuable form of economic thought.

As you can see, the five theories of economics deal with five different ways of organizing the economy. Which of these you consider most appropriate will probably depend upon the goals you have in mind when thinking about the role of the economy in your life. For example, in a pure market economy, individuals trade products according to their needs. However, in a democratic government where citizens are allowed a certain degree of economic freedom, you may opt for a system in which citizens can freely choose what products they would like to buy. Whichever of these you prefer, there are plenty of options out there.

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