Page 38 - Bus101FlipBook

2-4 Economics — A Primer [CH 2

Keynesian’s approach to economics, let it suffice to say that Keynesian economics is
Keynesian economics is a a theory that assumes the total spending of all income in the economy, which is termed
theory of total spending in aggregate demand, that everything is used up and thus there is a finite limit on goods
the economy, which is and services and that this equally effects production output and inflation. A simple
termed aggregate demand,
that everything is used up, illustration is a pie. There are pieces of that pie that everyone gets (though some see it
and this has its effects on as entitlements), the resultant argument becomes how shall the pie be “fairly”
output and inflation. distributed. The short fall is that people interpret this to identify that some have taken a
bigger piece of the pie. This thought process forces economics to be a zero-sum

process. Keynesian theory also places the state at the center of an economy, such as
with socialism and communism, contrasted with capitalism which places the
individual in the economic center with a free market; the center of a free market
economy is not a zero-sum process as more pies can be baked.
cost-push inflation
Inflation resulting from a Cost-push inflation occurs when there is a significant increase in the cost to
significant increase in a produce a good or service. An increase in cost could be taxes levied by government on
production cost passed on a good or service, or when the suppliers of raw materials increase their prices to cover
to consumers. the increased cost of production. An example would be an increase in wages

employers pay to produce products. Memorize that all cost increases, regardless of
source, are passed onto the consumers, though the Keynesian economist will call this
cost-push inflation.
In contrast, demand-pull inflation is the result of buyers entering the market to
demand-pull inflation
Inflated sales price as a purchase more of a good or service that is available. These buyers (demanders)
response to too much compete for a limited supply, and as such, the price for goods and services increase.
money in circulation relative To differentiate who will receive the good or service, price is used as the
to the goods and services discriminator; thus, there is an interaction of suppliers (producers) and demanders
available.
(consumers) over products produced and the prices paid for those goods.
This type of inflation may also arise from an individual factor that increases
demand such as an increase in the money supply; an increase in the money supply
translates into more money available to purchase goods and services which increases

spending. When government enters the marketplace to purchase goods, the enormity
of the purchase removes product from the marketplace, limiting supply. Suppliers will
react by increasing prices which are reflected in the private sector demand; or
government enters the marketplace to artificially lower supply; a move to keep prices

high (this is only accomplished by taking tax dollars from one group to give to a
supplier as opposed to allowing the marketplace to set the price of goods).
Keynesian economists see increased costs of goods and services as inflationary
even though the business owner may only be reacting to the effects of production,

increased production costs or the consumers’ willingness (a choice) to pay higher
prices. We all agree that prices increase. However, increased production costs are not
inflation nor inflationary, when caused by the market place, rather a reaction to the
marketplace. Increased prices as a reaction to government intervention policies, such

as taxation and monetizing debt, are inflationary. The base cause is very different and
elicit different responses. For clarity, it must be stated that inflation occurs only when
government intrusively interferes in the marketplace. That interference can be printing
more currency, buying up supply, and leveling restrictions on production.
deflation. Occurs when
prices are declining over Deflation, the opposite of inflation, can be defined as occurring when prices for
time. goods and services are declining over time. Economists will say that the inflation rate
is negative when the economy is in a deflationary period.
Deflation generally occurs when the supply of goods rises faster than the supply of

money. The price for those goods or services decline, becoming less expensive to the
consumer. Personal computers have sharply dropped in price over the last fifteen years
as most people have a computer. To continue market demand, manufacturers have
increased the computer’s capacity, written software and configured them so they do

more at a faster rate. Though many of these changes have kept prices high, the overall
price has still declined. Technological improvements have allowed the supply of
computers to increase at a much faster rate than their demand or the supply of money.

Learning to Do, Doing to Learn, Earning to Live, Living to Serve
Copyrighted Material