Free Market Economic by Steven Kates - Book Report/Review Example

FREE MARKET ECONOMIC BY STEVEN KATES: FIVE CHAPTERS SUMMARY by Student’s Name Code + Course Name Professor University City/State Date Free Market Economic By Steven Kates: Five Chapters Summary Chapter 3: Value Added and the Role of the Entrepreneur The main two questions arising from chapter three are what is value and how value is added in an economic activity (Kates 2011, p.46). The theory, which tries to answer this question is Adam Smith’s theory of capitalism. Kates (2011, p.49) argues that a good or service has value because it can be used to satisfy a human need or produce something else with either greater or lesser value. According to capitalism theory, the main role of an entrepreneur is to produce goods and services of greater value than the inputs into any production process in a bid to make a profit. According to Steven (2011, p.50), for an entrepreneur to produce a good or service of value, then another good or service of value has to be given up. Therefore, in accordance to Smith’s theory of capitalism, value added occurs when the value of what has been produced is greater than the value of what was utilized in the production (Kates 2011, p.51). A production is said to be value adding when it is sold at a price that is able to pay all the total costs sustained in the whole process (Kates 2011, p.52). According to capitalism theory, for a production to have benefit, there must be a surplus of revenue after subtracting all the incurred costs of the inputs and the production process. Therefore, according to Smith, for an entrepreneur to realize any profit, he or she must endeavor in value adding production processes (Kates 2011, p.53). Chapter 6 and 7: Supply and Demand From the two chapters, the main question, which is arising, is how is a particular price arrived at amidst the competitive forces (supply and demand) of the market (Kates 2011, p.88). The price theory answers this question clearly and satisfactorily. According to the theory, the point at which the benefit achieved by those in demand of a good/service meets the supplier’s marginal cost is the most favorable market price for that good/service. According to Steven, competition is an important factor that regulates prices of commodities in the market (Kates 2011, p.91). It is obvious that a supplier would make huge profit by raising the price of a good or service. However, it is important for any supplier to consider the impacts such a move would have on the competitors in the market and the customers. Competition is among the sellers, who try to win as many customers as possible from the available market. This competition ensures continued supply of quality goods/services and good prices (Kates 2011, p.95). According to the price theory, ideal competition occurs there are so many buyers and sellers that no sole buyer or seller can unilaterally affect the price on the market (Kates 2011, p. 113). This means that in instances where there is a buyer or seller with greater power to influence market prices, there cannot exist perfect competition. This is a generalization because no market has ever achieved perfect competition but the supply and demand market forces still give a good estimate for what is happening most of the time in the market. Macroeconomic theory: Chapter 12 and 13 Several questions are arising from these two chapters. These include what causes economic growth? What factors causes inflation and depression? What brings about unemployment in an economy? (Kates 2011, p.219-220). Steven uses the Keynesian theory to answer these questions. However, Steven is prompt in pointing out that wherever Keynesian theory has been applied, there has been adverse economic impacts such as high rates of unemployment, high inflation rates, low economic growth to name but a few. According to Keynesian theory, optimal economic performance can be achieved through and economic depressions prevented by influencing aggregate demand (Kates 2011, p.228). Researchers such as Kate (2011, P. 236) point out that the driving force behind the level of activity and hence rate of unemployment is the level of demand of everything that is produced in that economy. According to Keynes, market is not self-regulating. The government should employ strategies and policies for regulating prices and wages to create an aggregate demand that will increase income and hence bring about employment, economic growth and avoid high inflation rates. However, Keynesian theory has faced much criticism. This theory is said to be single sided on the demand side of balancing an economy. According to Steven, there are consequences that a government suffers by influencing prices and wages. For instances, when prices are lowered in order to increase demand, there is high rates of unemployment since employers are not ready to add more staff for a production that is not brining in the expected income. Instead, they try to cut their number of staff in order to reduce cost and make some profit. All these bring about low rates of economic growth. Chapter 14: Classical theory of the cycle The main question arising from this chapter is: what are the factors that bring about the four phases of business cycle (the trough, recover, peak and recession) (Kates 2011, p.260). The classical theory has been used to provide answers to this question. According to classical theory, unemployment does not result from deficiency in demand, contrary to Keynesian arguments. Classical theorists argue that every good or service is production out of anticipation for its demand. Therefore, there is no need for government intervention in creating aggregate demand. According to Kates (2011, p.273), there are instances where producers may make economic mistakes and produce in large quantities a good or service that may lack enough buyers in the market. Such a case causes recession. Certain theories have been developed to explain recession, but according to Steven, the principle underlying recession is that there is excess supply of products and services in an economy more than the demand. In such instances, the producers either change their lines of production hence end up incurring more cost. In many cases, the producers tend to lower prices in order to get buyers for their unwanted goods and services, which at the end lead to low returns as income. Therefore, according to classical theorists, it is not only demand that influences recession and recovery but also supply since it is highly influenced by demand. Most classical theories agree that recessions in an economy occur due to errors in production and not because of deficiency in demand as Keynes argued in his theory (Kates 2011, p.279). Chapter 16 and 17: Money and credit The questions arising from these two chapters include: what factors leads to high rates of investment and savings in an economy? How does investment and saving affect inflation rates in an economy? How is inflation controlled? According to classical theorists, saving can be considered as postponed spending (Kates 2011, p.296). People decide to save when they have a surplus income that is not required in purchasing goods and services for the current use. Steven explains that with no savings, there would be no investment (2011, P.301). This is because individuals, institutions, and governments borrow the saved money in order to invest and make a profit. This constitutes a saving flow, whereby, whenever individuals are adding their savings to the savings pool, others on the other side are increasing their demand by using these savings. From Keynesian policy, inflation occurs when more money is spent on goods and services than the money that was used in producing such goods (Kates 2011, p.308). This expenditure brings about inflation in prices. Since there is increased savings, the banks have more money and hence the lending rates become low making it easy for borrowers to get loans. Therefore, the most effective strategy that many governments use in controlling inflation is by implementing monetary policy. Monetary policy ensures that the money flowing in the economy is reduced since interests are increased and hence fewer people seek loans (Kates 2011, p.321). According to Keynesian theory, to control inflation, aggregate demand should be reduced during economic expansions and increasing demand during economic recessions. However, Steven points out that the solution recommended by Keynes is short-lived and brings adverse effects to a nation’s economy. Recent news related to Value added and the role of the entrepreneur (chapter 3) “Washington DC News 2014, Schumer, Gillibrand announce nearly $640,000 in value-added producer grants for five farms & small businesses in Rochester Finger Lakes Region, Viewed 27 September 2014 ” On 21st August of this year, senators Charles Schumer and Kristen announced in Washington DC news that they would be releasing $643,000 to fund two agri-based small businesses in Rochester Lake region (Washington DC News 2014, par. 1). According to the news, the funds were aimed at enabling the two businesses to achieve value-added production procedures and market their new products in the available markets. Capitalism theory is of great help in understanding this piece of news in economic terms. It is important to point out that the two firms needed to produce goods of greater value than the input into their production processes in order to get profit. However, since they did not have the needed resources for such a production, the senators have made it an endeavor in supporting new small businesses to produce quality goods with greater value through value-added production methods (Washington DC News 2014, par.2). Recent news on Supply and Demand (chapter 6 and 7) Neuhauser, A 2014, Why the price of filling up has been going down, Viewed 27 September 2014 According to US news dated 23 September 2014, gas and diesel prices at the pump level have fallen to their lowest prices (par 1). This is after the European Union imposing sanctions on Russia, the second largest exporter of gas and diesel, in the year 2012 and oil fields having been seized up by the fighters of Islamic state group. From a price theorist point of views, there are several factors in play that are causing prices of gas and diesel to go down. First, due to sanctions imposed on Russia, the country is not able to export most it produced gas and diesel. Therefore, the supply in the country is more than the citizens can consume. Therefore, since the demand is lower than the supply, the prices are expected even to go lower at the pump level. However, if this trend continues, it will greatly influence the economic growth of Russia, which mainly depends on this sector for its economic growth. Recent news on Macroeconomic theory (Chapter 12 and 13) “Mutikani, L 2014, U.S. consumer inflation rises on high gasoline prices, Viewed 27 September 2014 ” According to Reuters’s news dated 2 July 2014, the US consumer inflation rises due to rising prices of gasoline (Mutikani 2014, par.1). According to Reuters, the US economy is already facing some extent of inflation as it heals from the impact of recession since 2012. From Keynes’ point of view, such a situation is created since the demand for gasoline is much higher than its supply. The news speculated that the Federal government would raise interest rates (Mutikani 2014, par. 2). This according to classic theory this is a move to reduce the amount of money floating in the economy to reduce the capability of people to spend on gasoline. Through this way, the demand will go down and prices will start going down. Recent news on Classical theory of the cycle (Chapter 14) “BBC News 2014, South African economy avoids recession, Viewed 27 September 2014 " According to BBC news dated 26 August 2014, South Africa has narrowly escaped a recession after economic analysts announced that the nation managed to make a 0.6% economic growth in the first quarter of the year 2014 (par, 1). However, the analysts argue that whether there is any economic growth or not, the country is not growing since it does not have capability to provide employment to its many citizens who remain unemployed. According to classical theory, currently, the supply and demand for goods and services in the South African market is almost equal. However, there is high rate of unemployment since according to the news, most South African spend most of their income in paying debts (BBC News 2014, par. 4). This means that there is no enough money in the economy to invest and hence provide job opportunities for South Africans. Recent news on Money and credit (Chapter 16 and 17) “New York Times 2014, U.S. consumers turn to auto loans at a record rate, Viewed 27 September 2014 ” According to New York Times dated 3 Sept 2014, many US consumers are taking loans in order to purchase second hand vehicles (par. 1). Banks and other financial institutions are willing to lend people who are credit challenges to buy these vehicles (New York Times 2014, par. 3). The New York times explain that the monthly payments that banks are getting from loans on used cars is increasing after every month. It has even reached a point that regulators are investigating the reason as why banks are willing to lengthen loan terms on used cars. From classical theory point of view, there are people in the US economy whose demand for borrowing has gone high resulting from the increased savings. Banks have made more money through increased savings and hence are able to lend to the people buying second hand cars at rates that the bank is able to make huge profits (New York Times 2014, par.5). This explains why banks are even willing to extend loan terms on used or second hand cars. Reference List BBC News 2014, South African economy avoids recession, Viewed 27 September 2014 Kates, S 2011, Free Market Economics: An Introduction for the General Reader, Kates Print. Mutikani, L 2014, U.S. consumer inflation rises on high gasoline prices, Viewed 27 September 2014 Neuhauser, A 2014, Why the price of filling up has been going down, Viewed 27 September 2014 New York Times 2014, U.S. consumers turn to auto loans at a record rate, Viewed 27 September 2014 Washington DC News 2014, Schumer, Gillibrand announce nearly $640,000 in value-added producer grants for five farms & small businesses in Rochester Finger Lakes Region, Viewed 27 September 2014 ” Read More