Economics at Zero Marginal Cost

The Liquidity Preference Theory of Interest Introduction The Liquidity Preference Theory of Interest was developed by John Maynard Keynes in The General Theory of Employment, Interest and Money (1936). It marked a major departure from the classical theory, which viewed interest as the price that equates savings and investment. Keynes argued that interest is the price paid for giving up liquidity. Since individuals prefer to hold wealth in the form of money because of its liquidity, interest serves as an incentive to hold less cash and more interest-bearing assets. Thus, Keynes placed the demand for money (liquidity preference) and the supply of money at the centre of interest rate determination. The Concept of Liquidity Preference Liquidity preference refers to the desire of individuals and firms to hold a portion of their wealth as cash rather than investing it in financial assets. According to Keynes, people demand money not only to facilitate transactions but also because it provid...

 Wage fund Theory of Wages - Adam Smith (1776) & J.S. Mill (1848) Introduction: The Wage Fund Theory of Wages is a concept from early economic theory that seeks to show that the amount of money a worker earns in wages, paid to them from a fixed amount of funds available to employers each year (capital), is determined by the relationship of wages and capital to any changes in population. The theory was developed by Adam Smith and later developed by J. S. Mill. According to this theory, there is a wage fund in every country. This fund is of a fixed size. The wages to the workers are paid out of this fund. The average wage can be calculated by dividing the wage fund by the number of workers. The wage-fund theory held that wages depended on the relative amounts of capital available for the payment of workers and the size of the labour force. Wages increase only with an increase in capital or a decrease in the number of workers. Although the size of the wage fund could change over t...

Subsistence Theory of Wages – Adam Smith (1776), David Ricardo (1817), and Thomas Malthus (1798) Introduction: The Subsistence Theory of Wages is one of the earliest explanations of wage determination in classical economics. Emerging in the 18th and 19th centuries, it was developed and refined by Adam Smith, David Ricardo, and Thomas Malthus. The theory rests on the premise that wages tend to gravitate toward a level that provides just enough for workers and their families to subsist. While it played a significant role in shaping early economic thought, it has since been criticized and replaced by more dynamic and realistic wage theories.   Key Tenets of the Subsistence Theory of Wages 1. Wage Determination: The central idea of the theory is that wages are determined by the cost of subsistence — the minimum level of income required to sustain the life of a worker and their dependents. This includes essential needs such as food, shelter, and clothing. Employers, under competit...

  Types of Economic Analysis There are three types of economic analysis. They are 1. Static Analysis 2. Comparative Static Analysis 3. Dynamic Analysis 1. Static Analysis Static analysis studies a particular point of equilibrium. It does not show the path of change. It only tells us about the condition of equilibrium. In static economic analysis, time element has nothing to do. All economic variables are constant and refer to the same point of time. It is also known as Equilibrium Analysis. Example of Static Analysis is the simple market model with one equilibrium point. Useful mathematical tools for static analysis: Linear Models Matrix Algebra 2. Comparative Static Analysis Comparative static analysis is the comparison of two different economic outcomes, before and after a change in some underlying parameter. It does not study the motion towards equilibrium nor the process of change itself. Comparative Statics completely disregard the process of adjustment of the variables and...