Paul De Grauwe published, “Yes, It’s the economy, stupid, but is it demand or supply?” on January 24, 2014 for CEPS Commentary. According to Paul De Grauwe, policy-makers are trying to fight a problem with the ‘wrong medicine’ as he puts it. He explains how before the 1970s economists focused on demand control; then when the 1970s came a supply shock that they were unprepared for hit. Due to this unpredicted supply shock, economists started developing different supply-side models that would hopefully combat this problem and keep it from happening again. However, with the corrections from the supply shock, they no longer focused on demand, and that resulted in a demand shock in 2008, where repeated mistakes occurred. François Hollande is mentioned to believe in the power of free market and that “…supply-side economics together with rejection of demand management is based on an ideological premise that markets have self-regulating characteristics, and that unemployment with therefore disappear automatically…” (Grauwe 4)
Before the 1970s, economists focused on demand control, believing the supply was flexible enough to always adjust to demand. Demand is the relationship between price and quantity demanded; all other things constant. Before the 1970s, the created macroeconomic models, known as Keynesian models, were to tell how to control demand, to keep it stabilized so a country did not spiral into a deflationary period. They expected a demand shock do to this, but instead, in the 1970s they got a supply shock. A negative supply shock, as was the case, is when production costs increase and quantity supplied is decreased and any aggregate price level. Policy-makers, however, said this was a negative demand shock, and tried to fight...
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...tions of demand shock and supply shock.
“Yes, It’s the economy, stupid, but is it demand or supply?” was published on January 24, 2014 by Paul De Grauwe for CEPS Commentary. The ‘wrong medicine’ as De Grauwe says, continually goes to the problems, but never seems to solve them correctly. Before 1970, there was a focus on demand shock, in 1970 there was a focus on demand shock for a supply shock, and in 2008-09, there is a focus on supply shock for a demand shock. Development on different models started to try to predict the shocks, and the creation of the supply-side model to replace the Keynesian model began. Repeating of old mistakes, it seemed in 2008 that the economists had not learned a thing from the 1970s. Economists do not seem to always learn from old mistakes, but in the end, sometimes it takes several repeats and misdiagnoses to get things done correctly.
First, I will discuss the time period between 1973-1974. Because the unemployment and inflation rates are higher than normal, we can assume that the aggregate-demand curve is downward-sloping. When the aggregate-demand curve is downward-sloping, we know that the economy’s demand has slowed down. When the economy’s demand has slowed down, businesses have to choice but to raise prices and lay off workers in order to preserve profits. When employers throughout the country respond to their decrease in demand the same way, unemployment increases.
December of 2007 saw the beginning of the worst economic downturn in memorable history; not since the end of the Great Depression in 1939 has the world seen such a devastating and long-lasting economic breakdown. The Great Recession shook the public’s faith in the capitalist system and silenced those who claimed a modern economy was impervious to another broad collapse like the one in 1929. Discontent and mistrust from the public has built not only with large corporations and the financial sector, but also with the government whose legislature and policies in recent decades seem to coincide with the interests of private corporate power-houses. These lenient policies contributed directly to the recession that affected individuals across the globe. Stunted wages, increased poverty,
Before the introduction of Keynesian economics and Milton Friedman’s Monetarism theory, there was classical economics. These economists believed in self-adjusting market mechanisms, however with that the market needs perfect competition. Wages and prices in the market must be flexible. These economists believe that supply and demand pulls would always help the economy reach full employment.
The economic business cycle of the world is its own living and breathing entity expanding and contracting with imprecise balances involving supply and demand. The expansions and contractions also known as booms and recessions support a delicate equilibrium of checks and balances, employment and unemployment. The year 1929 marked the beginning of the downward spiral of this delicate economic balance known as The Great Depression of the United States of America. The Great Depression is by far the most significant economic event that occurred during the twentieth century making other depressions pale in comparison. As a result, it placed the world’s political and economic systems into a complete loss of credibility. What transforms an ordinary recession or business cycle into an authentic depression is a matter of dispute, which caused trepidation among economic theorists. Some claim the depression was the result of an extraordinary succession of errors in monetary procedure. Historians stress structural factors such as massive bank failures and the stock market crash; economists hold responsible monetary factors such as the Federal Reserve’s actions when they contracted the currency distribution, and Britain's attempt to return their Gold Standard to pre-World War parities. Subsequently, there are the theorists such as the monetarists, who presume that it began as a normal recession, however many policy errors by the monetary establishment forced a reduction in the money supply, which worsened the economic condition, thereby turning the normal recession into the Great Depression. Others speculate that it was a failure of the free market or a failure of the government in their efforts to regulate interest rates, slow the occ...
We the consumer would rather pay less for any product that is needed or want. Ultimately we are the reason for high prices as well as low prices. Prices of products do not always stay the same and more popular products have higher prices than less popular products. These fluctuations, high prices and low prices are from the idea of supply and demand. Supply and demand defines the effect that the availability of a particular product and the desire or demand for that product has on price. Generally, if there is a low supply and a high demand, the price will be high (Investopedia). To understand the idea of supply and demand, the understanding of supply and the understanding of demand must be defined. The Law of Supply states that at higher prices, producers are willing to offer more products for sale than at lower prices, also that the supply increases as prices increase and decreases as prices decrease (Curriculum Link). The Law of Demand states people will buy more of a product at a lower price than at a higher price, if nothing changes, at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price and that at lower prices, people tend to buy some goods as a substitute for others more expensive (Curriculum Link). In todays economics these ideas are seen frequently in everyday life. The laws of supply and demand are seen in many ways in the company Apple Inc. Each year Apple Inc unveils a long awaited mobile operating system and IPhone. We can also see many aspects of the law of supply and demand in Nike Inc’s Jordan Brand. Jordan Brand has released a number of...
Gustman, A. L., Steinmeier, T. L., & Tabatabai, N. (2012). How Did The Recession Of
...more of a Keynesian thinker more than a new classical thinker. Although it might be true that having free market is the right way of having a stabled economy, but unemployment will still be high and might be increasing which is still till now one of the troublesome that governments face today. Plus, what happens if recession hits or even worse we go back to 1930’s where there was the great depression, it was proved then and will be proved again if happened that the only way to solve a sort of crises is by government intervention (basically spending). Yes it will increase inflation but creates more job opportunities and unemployment will decrease if government intervention occurs. Yes in the long run this might be bad but people care about tomorrow more than they care about 3 or 4 years from now or even more. As Lord Keynes once said “in the long run we are all dead”
...sez-faire" and relied heavy on market forces to achieve necessary economic corrections. But market forces alone are not always able to achieve the desired recovery in the economy. Whether in the form of taxation, industrial regulation, public works, social insurance, social welfare services, or deficit spending the government must assume a principal role in ensuring economic stability. New theories and ideas came out of the depression like Keynesian theory. Which states that recessions and depressions happen because people hoard their money and to fix this the government should do the opposite and spend money(5).
“Microeconomics and macroeconomics can be described in terms of small-scale vs. large-scale or in terms of partial vs. general equilibrium. Perhaps the most important distinction, however, is in terms of the role of equilibrium. While issues in microeconomics seldom challenge the notion of a naturally occurring equilibrium, the existence of business cycles and, especially, unemployment suggests too many observers that macroeconomics raises issues of a different character.” (McConnell & Brue, 2004).
The demand-side economics is based on a belief that the main force affecting overall economic activity and causing short-term decreases is consumer demand for goods and services. A reliable source describes, "At the core of demand side economics is the focus on aggregate demand. Aggregate demand is the combination of consumption of goods, industry investment in capital goods, government spending and net exports. When other elements of aggregate demand are weak, the government can mitigate their impact by increasing its spending. The government can intervene to generate demand for goods and services." The people who believe in the demand-side also believe that there should be high government during high recession points to overcome a short-term low aggregate demand. Increasing the aggregate demand will reduce unemployment and encourage economic activity, according to this theory. The government rises demand through spending on public goods and services as well as through its control of the money supply through changing interest rates or exchanging on government-issued
The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)
When it comes to the world of economics, there are always the same old topics: supply
Economics is probably the science that arguably has had the most impact in today’s times. In fact it can barely be called a science in a strict sense, since human behavior is not governed by laws of nature unlike other non living objects, which makes the prediction and forecasting stock prices, economic conditions all the more difficult. In recent decades economists have tried to give a more structured and mathematical explanation to their theories concerning how human beings make their decisions. However these theories have come under immense criticism as they don’t hold true in real time. In reality, human beings rarely behave rationally which is the basic assumption in many of the economic theories; rather we make a lot of our decisions based on our intuition and limited knowledge available to us. When the financial crisis of 2008 came upon us, a lot of questions were raised on the apparent predictive abilities of the various economic theories. Merely 12 economists were able to foresee the massive crisis which now shows signs of deepening into a double dip recession.
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the amount of goods that buyers are willing and able to purchase at various prices, assuming all other non-price factors remain the same. The demand curve is almost always represented as downwards-sloping, meaning that as price decreases, consumers will buy more of the good. Just as the supply curves reflect marginal cost curves, demand curves can be described as marginal utility curves. The main determinants of individual demand are the price of the good, level of income, personal tastes, the population, government policies, the price of substitute goods, and the price of complementary goods.
One factor is the increase of income rate. As the diagram shows below, it results the demand curve shift from D to D1. When people get more income, more money will be available for them to spend. Since the purchase power of customers improves, the demand of them increases as well. Make luxury handbags as the example. If a woman earns five hundred pounds per month, she may not be willing to buy a handbag in expensive price because she need to keep life going. But if this woman gets a higher salary of one thousand pounds or even more per month, or she wins a lottery in big amounts, she will be more willing to buy a luxury handbag. Thus the demand of luxury handbags will increase. As the movement of demand curve a shortage will occur. A new equilibrium will appear until the price moves from P to P1. And the quantity will rise from Q to