A discussion on the theories in economics

New classical economics Economic theories try to explain economic phenomena, to interpret why and how the economy behaves and what is the best to solution - how to influence or to solve the economic phenomena. They are comprehensive system of assumptions, hypotheses, definitions and instructions what should be done in a certain economic situation. In principle, the approach to economic theory is divided into positive and normative. All economic theories used to explain specific situations or problems in the economy of some of its models.

A discussion on the theories in economics

Different economists have presented different theories on inflation. The economists who have provided the theories of inflation are broadly categorized into two labels, namely, monetarists and structuralists.

Monetarists associated inflation to the monetary causes and suggested monetary measures to control it. On the other hand, structuralists believed that the inflation occurs because of the unbalanced economic system and they used both monetary and fiscal measures together for sorting out economic problems.

There are three main theories of inflation, which are shown in Figure Let us learn about the different theories of inflation as shown in Figure-3 in detail. Market-Power Theory of Inflation: In an economy, when a single or a A discussion on the theories in economics of sellers together decide a new price that is different from the competitive price, then the price is termed as market-power price.

Such groups keep prices at the level at which they can earn maximum profit without any concern for the purchasing power of consumers. For example, in the past few years, the prices of onion were very- high in India. The soaring price of onions was the result of the group action of onion producers.

In such a situation, people in middle and low income groups reduced the consumption of onions. However, onion producers earned high profits from higher income group. According to the advanced version of market power theory of inflation, oligopolists can increase the price to any level even if the demand does not rise.

This hike in price levels occurs due to increase in wages because of trade unions in the oligopolistic industry. The increase in wages is compensated with the hike in prices of products. With increase in the income of individuals, their purchasing power also increases, which further results in inflation.

Apart from this, some economists concluded that fiscal and monetary policies are not applicable in practical situations as these policies are not able to control rise in prices levels. These policies would work only when prices rise due to an increase in demand. Moreover, these policies cannot be applied to oligopolistic rise in prices, which is due to increase in the cost of production.

Monetary policy can reduce the rate of inflation by raising the interest rate and regulating the credit flow in the market. However, it would have no effect on the oligopolistic price as the cost is transferred to the prices of goods and services. The market power theory of inflation represents one extreme end of inflation.

According to this theory inflation exists even when there is no excess in demand.

A discussion on the theories in economics

On the other end, the conventional demand-pull theorists believed that the only cause of inflation is the excess of aggregate demand over aggregate supply. In full employment equilibrium condition, when demand increases, inflation becomes unavoidable.

In addition in full employment condition, the economy reaches to its maximum production capacity. At this point, the supply of goods and services cannot be increased further while the demand of products and services increases rapidly.

Due to this imbalance between demand and supply, inflation takes place in the economy. Structural Theories of Inflation: Apart from the two extreme ends mentioned in the above, there is a middle group of economists called structural economists.

According to structural theory of inflation, market power is one of the factors that cause inflation, but it is not the only factor. The supporters of structural theories believed that the inflation arises due to structural maladjustments in the county or some of the institutional features of business environment.

They have provided two types of theories to explain the causes of inflation, which are shown in Figure Let us study the different types of structural theories of inflation as shown in Figure-4 in detail in the next sections.

Mark-up theory of inflation was proposed by Prof Gardner Ackley.The 50 Most Important Economic Theories, by Donald Marron [ ] on August 17, at pm Donald Marron I love the fact that WordPress decided the most similar post in all of WordPress-land is one about the failures of string theory in physics.

surpass many, perhaps even most, of the more traditional fields of economics in the quality and quantity of combined scholarly output.” 3 The Efficient Market Theory presented by Fama () is a prime example.

The theory is critically opposed by, among others, a .

The New Theories of Economics, by Vilfredo Pareto,

The theory developed by these economists is known as classical theory of economic growth. Further, in late 19 th and 20 th centuries, Karl Marx presented a theory called theory of historical growth and Schumpeter developed a growth theory of . Explaining Theories of Economic Growth Tejvan Pettinger September 17, growth Different models of economic growth stress alternative causes of economic growth.

ADVERTISEMENTS: In this article we will discuss about the Rostow’s theory of Growth. At the end of the Second World War () there was a renewal of interest in the subject of development economics and the stages of growth once again preoccupied many scholars.

As a non-communist manifesto, W. W.

Explaining Theories of Economic Growth | Economics Help

Rostow’s stages of economic . The optimum theory is superior to the Malthusian theory because it studies the population problem in relation to the economic conditions of a particular country.

A discussion on the theories in economics

(2) Malthus had a narrow vision. He related the growth of population to food supply.

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