Economic Theory and the US Economy
Frequently Asked Questions
What is an economic theory?
An economic theory is used to explain and predict the working of an economy to help drive changes to economic policy and behaviors. Economic theories are based on models developed by economists looking to explain recurring patterns and relationships. These theories connect different economic variables to one another to show how they’re related.
What is Keynesian economic theory?
Keynesian economics is a theory that says the government should increase demand to boost growth. Keynesians believe consumer demand is the primary driving force in an economy. Its main tools are government spending on infrastructure, unemployment benefits, and education. A drawback is that Keynesian policies could increase inflation.
What is the economic theory of mercantilism?
Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a surplus. Mercantilism funds corporate, military, and national growth and advocates trade policies that protect domestic industries.
What is the economic theory behind socialism?
The economic theory behind socialism—an economic system in which citizens share ownership of the various factors of production—is community or solidarity. Socialists believe people should value the freedom and well-being of others as much as their own, and that the economic system should support that goal.
What is economic development theory?
Economic development theory aims to answer the question “why are some countries developed, but others less developed?” It focuses on the financial, social, and economic conditions in developing countries, such as health, education, and employment, to better understand how they could be improved.
What was Karl Marx's economic theory?
Karl Marx’s economic theory critiques capitalism and how it is unjust because there is a struggle between social classes when it comes to labor, production, and economic development. His theory suggests that communism may be a more just economic system.
Nationalism is an ideology by people who believe their nation is superior to all others. This sense of superiority often has its roots in a shared ethnicity.
Economies of Scale
Economies of scale are cost reductions that occur when companies increase production. The fixed costs, like administration, are spread over more units of production. Sometimes, a company that enjoys economies of scale can negotiate to lower its variable costs, as well.
Law of Demand
The law of demand states that all other things being equal, the quantity bought of a good or service is a function of price.
The Laffer Curve is an economic theory that describes the potential impacts of tax cuts on government spending, revenue, and long-term growth. Economist Arthur Laffer developed it in 1974. He argued that tax cuts have two effects on the federal budget: arithmetic and economic.
The word “imperialism” comes from the Latin term imperium which means "to command." Imperialism is the policy or act of extending a country’s power into other territories or gaining control over another country’s politics or economics.
Late-stage capitalism describes the unrealistic perspectives of the wealthiest 1%. In the same vein, it highlights how the middle class is largely oblivious to the struggles of the poor.
In economics, inelastic demand occurs when the demand for a product doesn't change as much as the price. For example, if the price increases 20%, but the demand only goes down by 1%, the demand for that product is said to be inelastic.
Monetarism is an economic theory that says the money supply is the most important driver of economic growth. As the money supply increases, people demand more. Factories produce more, creating new jobs.
Businesses are always looking for methods to reduce costs and control the quality of the products and services they provide. Vertical integration is when a company is able to create a competitive advantage by integrating different stages of its production process and supply chain into its business.
Supply-side economics is the theory that says increased production drives economic growth. The factors of production are capital, labor, entrepreneurship, and land.
Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. The benefits of buying the good or service outweigh the disadvantages. The country may not be the best at producing something, but the good or service has a low opportunity cost for other countries to import.