Keynesian Model In Economics: An Introduction

Keynesian Model In Economics has gained a very important place. It is regarded as one of the basic models of modern Economics as we know it.

According to the Keynesian Model In Economics, Consumption is the spending on consumer goods over a given period, usually a year. Consumer goods are goods and services that are consumed or used up within the year, such as food or electricity. In practice, however, many goods counted as consumption goods last longer than a year such as dresses, cars and toasters, etc.

John Maynard Keynes made two key assumptions about what determines consumption spending.

• Assumption 1: People base their consumption spending mainly on their current take-home pay, i.e., on disposable income or DI.
• Assumption 2: When people get additional income, they do not spend it all.

Keynesian Consumption Function shows the level of consumption at different levels of disposable income, holding constant the other determinants of consumption. In Keynesian Consumption Function, consumption goes up as the disposable income goes up but not all of the additional income is consumed.

The Keynesian Consumption Function

Disposable Income (DI)	Consumption (C)	Savings (S)
$ 3000	$ 3400	- $ 400
4000	4200	- 200
5000	5000	0
6000	5800	200
7000	6600	400
8000	7400	600
9000	8200	800
10000	9000	1000

Savings is unconsumed income (disposable income minus consumption). At the “break-even” income of $5000, savings are zero. Below, $5000, there is dissaving (or negative savings). To dissave – to consume more than is earned – people can borrow money or draw down their bank accounts. Above $5000, savings are positive. Every $1000 added to income adds $200 to savings. The marginal propensity to save (MPS) is the added savings divided by the disposable income that caused savings to go up. Here MPS = 0.2 = ($200/$1000)

Since every added dollar of income is consumed or saved, we have:

MPC + MPS = 1

Note that the average propensity to consume (APC), which is consumption divided by disposable income, does not have to equal the MPC. At DI = $10000, for example, C/Di = 0.9 while MPC = 0.8.

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Our other articles on Economics include Labor Economics, Inflation, Demand for Money, Balance of Payments and Balance of Payment (contd)

The Concept of Recessions In Economics

In Economics, Recessions can be found in business cycles. Business cycles are the total ups and downs of an entire nation or possibly the entire world from time to time, over a period of more than 10 years. Recession in Economics is considered to be a decline in economic activity.

An economy operating at its potential level is said to be at full employment. At full employment, some unemployment occurs. This is consistent with the shifting of workers between jobs due to changing tastes and technology.

A recession occurs when GDP falls significantly below its full employment level. The Department of Commerce defines a recession as when real GDP declines for two consecutive quarters.

Two types of recessions occur. First, output can fall if the economy is operating at below its potential (full employment) level. Second, output can fall if the economy’s potential level of output falls.

The first type of recession occurs when output falls significantly below its full-employment level in a recession. Unemployment grows as a large number of workers cannot find work. The most dramatic recession of this type was the Great Depression, where 25 percent of the workforce was unemployed and real output fell more than 30 percent. This type of recession usually occurs when consumers and investors reduce their aggregate spending.

The second type of recession occurs when the economy’s potential output falls. For example, a nation that passed a minimum wage of $2000 will likely experience massive unemployment and a recession. Its potential output has decreased. As another example, a decline in efficiency or a decline in technological progress could cause output to fall. Even if unemployment rises, the economy may still be fully employed in the sense that employers are fully hiring all workers they can.

The difference between a decline due to full-employment output falling below its full-employment level and a decline due to full-employment output falling is crucial. The first type of decline fits recessions described by Keynesian and monetary economists, each giving different reasons for the decline in spending. The second type fits recessions described by rational expectations economists, who give different reasons for the decline in full-employment output.

Why Recessions occur

Two startling facts exist about modern capitalistic economies. The first is that they have recessions. The second is that most of the time they are not in recessions. This suggests that some cause occasionally derails the economy. Yet, over time, the economy rebounds to full employment. But how can an economy recover? The explanations are given below.

Monetary Economists: This school of classical economists observes that sudden and large decreases in the money supply or decreases in the rate of monetary growth usually precede recessions. While the economy naturally tends to be fully employed, sudden unexpected declines in the money supply will decrease total spending, decreasing the economy until people and prices can adjust to having less cash.

Keynesian Economists: John Maynard Keynes emphasized the importance of total spending and the components of total spending (consumption, investment, government spending and net exports). In particular, he felt that when people reduced consumption spending to save more, financial markets in times of uncertainty would be unwilling to spend the new savings on investments. The result would be a decrease in total spending. Keynes also believed that prices are sticky – resistant to changes. The mix of less spending and fixed prices means lower output and a recession. Keynesian today put a similar emphasis on total spending and the rigidity of prices for explaining the business cycles.

For more details you can visit our website at http://www.helpwithassignment.com/economics-assignment-help and http://www.helpwiththesis.com

Our other articles on Economics include Labor Economics, Inflation, Demand for Money, Balance of Payments and Balance of Payment (contd)

Economics Assignment Help

Economics is one of the most important subjects in Arts, Commerce and Business Management. Economics is one of those few subjects which speaks relentlessly at the individual firm level (micro-economic) and at national or international level (macro-economic). The subject is very important in calculating the demand for an individual firm, an industry on the whole and the demand for all the goods and services in the country. The subject also includes concepts of Global Economy.

Economics is the study of unlimited wants over limited resources. The study of Economics is particularly important and relevant in business administration. For example if a company wants to introduce a new product into the market, then it must know how the demand for the product is. If the product has a close substitute, then it will look at the market of that substitute and can conclude what would be the demand for the product if it is introduced. This is just one side of the story. The other side of the story is the supply. If the demand can be anticipated, then the supply of the product can also be formulated. This formulation is very important because, for example if the demand for the product is say about 1000 units and regardless of this if the company produces 5000 units, then the 4000 units produced will be a waste of resource and in some cases a loss to the company. So, a proper supply calculation is also important.

There are other things which the subject of Economics also speaks about is the market conditions. Markets are one of the important factors to be considered while producing goods. Markets in Economics can range from Perfect Competition on one extreme and Monopoly, another extreme. The rest of the market conditions like Monopolistic competition, Oligopolistic competition, Oligopoly, Duopoly, etc fall in between the two extremes of market conditions. The concept of market condition is important because a firm will act differently in different market conditions. For example, if the firm is a monopoly, then the firm will try to earn abnormal profits for a long period of time. Looking at these abnormal profits, other firms will try to enter the market and will try to make good of these profits. If these firms successfully enter the market and start producing goods, then the earlier monopoly firm will earn abnormal profits as it used to do. And on the other extreme if a firm is part of perfect competition, then the firm will behave differently. As the market conditions will not permit to increase the price, the firm will not increase the price and it will not decrease the price for more demand because, decreasing the price will only yield loss to the firm. So, a thorough knowledge of market conditions is very essential in the study of Economics.

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