Overview:

I.

Branches of Economics
A. Major Branches:
1. Macroeconomics
2. Microeconomics
B. Sub-branches:
1. Classical Economics
2. Mathematical Economics
3. Behavioral Economics
4. Development Economics
5. Social Economics/Socioeconomics
6. Others:

Attention economics

Bioeconomics

Contract theory

Econometrics

Economic geography

Economic history

Economic sociology

Education economics

Energy economics

Environmental economics

Feminist economics

Financial economics

Georgism

Green economics

Industrial organization

Information economics
International economics
Institutional economics
Islamic economics
Labor economics
Law and economics
Managerial economics
Monetary economics
Public finance
Public economics
Real estate economics
Regional science
Resource economics
Socialist economics
Welfare economics

II.
II.

10 Principles of Economics
A.
1.
2.
3.
4.
B.

C.

III.

How People Make Decisions

People Face Tradeoffs
The Cost of Something Is What You Give Up to Get It
Rational People Think at the Margin
People Respond to Incentives
How People Interact
5. Trade Can Make Everyone Better Off
6. Markets Are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
How The Economy As A Whole Works
8. A Countrys Standard of Living Depends on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Tradeoff between Inflation and Unemployment

Different Economists and Their Theorists:

1. Adam Smith
2. David Ricardo
3. Thomas Maltus
4. John Stuart Mill
5. Karl Marx
6. Leon Walras
7. Alfred Marshall
8. Thorstein Veblen
9. John Meynard Kenes
10. Irving Fisher

III.

Branches of Economics

IV.

Main Branches:

1. Macroeconomics
- the overall/aggregate behavior of the economy
- studies the economy as a whole (the entire economy)
- behavior of firm and household together and treat them as one
- economy on a country level and utilizes facts from that country's economic
performance (gross domestic product, inflation, government interest rates and
unemployment)
- limitations:
V. a. Ignores the welfare of individuals in an economy
VI. b. Takes into account only aggregate variables, which may not clearly
define economic conditions.
VII.
2. Microeconomics
- deals with individual behavior of firms and household
- examines the performance and behavior of individual organizations and
consumers in an economy
- study of transactions between people and businesses and how the flow of
money operates between these basic entities (business investments,
personal savings)
- study of decision-making process of individuals, organizations and consumers
- supply and demand patterns and price and output determination of individual
markets
- supply and demand relationship between buyer and seller and how this
ultimately determines equilibrium prices of goods and services
- drawbacks:
VIII.
a. Assumes full employment condition in an economy, which is
unrealistic
IX. b. Deals with the part of economy instead of whole economy
X.
XI.
XII.

XIII.

Sub-branches:

A.

Classical Economics
by Adam Smith (Wealth of Nations, 1776)
Classical Theory
developed shortly after the birth of western capitalism
Rise of capitalism: the breakdown of serf-based labor in England, as well as the creation of the first joint stock
company in 1555.
(After capitalism gave birth to the Industrial Revolution, public intellectuals offered competing theories about
its causes and consequences. Classical economists provided the best early attempt at explaining capitalism's
inner workings.)
Earliest classical economists developed theories of value, prices, supply, demand and distribution. Nearly all
rejected government interference with market exchanges, giving rise to the French phrase "laissez-faire," or
"let it be."
If everyone did what was best for themselves, the result would be best for society.

B.

Mathematical Economics
application of mathematical methods to represent theories and analyze problems in economics
differential and integral calculus, difference and differential equations, matrix algebra, mathematical
programming, and other computational methods
Mathematics allows economists to form meaningful, testable propositions about wide-ranging and complex
subjects which could less easily be expressed informally. Further, the language of mathematics allows
economists to make specific, positive claims about controversial or contentious subjects that would be
impossible without mathematics

C.

Behavioral Economics
the study of psychology as it relates to the economic decision making processes of individuals and institutions
explores why people sometimes make irrational decisions, and why and how their behavior does not follow
the predictions of economic models
studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of
individuals and institutions and the consequences for market prices, returns, and resource allocation, although
not always that narrowly, but also more generally, of the impact of different kinds of behavior, in different
environments of varying experimental values
Bounded Rationality, Illusion of Validity, Anchoring Bias, Procrastination

D.

Development Economics
deals with economic aspects of the development process in low-income countries
focus: methods of promoting economic development, economic growth and structural change but also on
improving the potential for the mass of the population, for example, through health and education and
workplace conditions, whether through public or private channels
about the transition of whole economies from low-productivity, poor places into high-productivity industrial
economies. This transition encompasses several aspects: a move out of agriculture and into manufacturing or
services, urbanization, declining fertility rates, integration with global markets.

E.

Social Economics / Socioeconomics

studies how economic activity affects and is shaped by social processes
analyzes how societies progress, stagnate, or regress because of their local or regional economy, or
the global economy
focuses on the relationship between social behavior and economics, and it examines how social norms, ethics
and other social philosophies that influence consumer behavior shape an economy, and uses history, politics
and other social sciences to examine potential results from changes to society or the economy
Involves the relationship between social and economic factors within a society. These are factors that
influence how a particular group, or socioeconomic class, act within society including their actions as
consumers. Different socioeconomic classes may have varying priorities regarding how they direct their funds

XIV.

XV.

XVI.

XVII.

XVIII.

XIX.

Professor Greg Mankiw teaches economics at Harvard University and is the

author of a popular economics text book called Principles of Economics which
is used at many Ivy League schools. Mankiws status within the economics
profession makes him uniquely well placed to help us understand the basic
principles of economics.

XX.
10 Principles of Economics:
XXI.
How People Make Decisions
XXII. 1. People face tradeoffs:
XXIII. To get one thing, you have to give up something else. You may have heard
economists say there is no such thing as a free lunch. What they mean by
this is that, for example, you might get a free bowl of soup at the student coop, but the soup is not free because you have to give up 35-minutes waiting
in line to be served.
XXIV. 2. The cost of something is what you give up to get it:
XXV. Making a decision requires comparing the costs and benefits of alternative
courses of action. The cost of one option is not how much it will cost in dollar
terms, but rather the value of your second best alternative. For more
explanation, see understanding the cost benefit analysis.
XXVI. 3. Rational people think at the margin:
People make decisions by comparing the marginal benefit with the marginal
cost. For example, you might buy one cup of coffee in the morning because it
helps you start the day, but you might not buy a second cup because this
gives you no extra benefit (and costs another $3).
XXVII. 4. People respond to incentives:
Behaviour changes when costs or benefits change. For example, if your
hourly wage increases then you are likely to work more (unless of course your
income is already too high).
XXVIII.

How People Interact

XXIX. 5. Trade can make everyone better off:

Trade allows people to specialise in what they do best. By trading, each
person can then buy a variety of goods or services. For example, you may be
a skilled management consultant. Money you earn through your consulting
work might be used to build a house even though you may not have the skills
to build the house yourself.
XXX. 6. Markets are usually a good way to organise economic activity:
Individuals and firms that operate in a market economy respond to prices and
thereby act as if guided by an invisible hand which leads the market to
allocate resources efficiently. For example, if there is an oversupply of wheat
on the world market then individual farmers will lower the price they charge
until they can sell all of their wheat. Lower wheat prices will also likely reduce
the total quantity of wheat that farmers decide to produce. Market prices are
able to adjust to equate supply and demand without the need for any central
planning.
XXXI. 7. Governments can sometimes improve market outcomes:
Sometimes a market may fail to allocate resources efficiently, and
government regulation can be used to improve the outcome. Market failures
can occur due to the existence of public goods, monopolies and externalities.
For example, an electricity supplier might have a monopoly. Government
regulation may be required to ensure that the supplier does not abuse its
market power.
XXXII. How the Economy Works
XXXIII.

8. A countrys standard of living depends on its ability to produce

goods and services:

A country whose workers produce a large number of goods and services per
unit of time will enjoy a high standard of living.
XXXIV.

9. Prices rise when the government prints too much money:

Printing money causes inflation. When a government prints money, the

quantity of money increases and each unit of money therefore becomes less

valuable. As a result, more money is required to buy goods and services. For
more explanation, see quantitative easing.
XXXV.10. Society faces a short-run tradeoff between inflation and
unemployment:
Reducing inflation often causes a temporary rise in unemployment. This
tradeoff is the key to understanding the short-run effects of changes in taxes,
government spending and monetary policy. For more explanation, see
the Phillips curve.
XXXVI.
XXXVII.

XXXVIII.
Econom
ic
Sys
tem

XXXIX.
sm

XLI.

XLII. Capitalism is
unconcerned about
equity. It is argued
that inequality is
essential to
encourage innovation
and economic
development

XLIII. Socialism is
concerned with
redistributing
resources from the
rich to the poor.
This is to ensure
everyone has both
equal
opportunities and
equal outcomes.

XLIV. Own
ershi
p

XLV.

XLVI. The State will own

and control the
main means of
production. In
some models of
socialism,
ownership would
not be by the
government but
worker
cooperatives.

XLVII. Effici
ency

XLVIII. It is argued that the

profit incentive
encourages firms to
be more efficient, cut
costs and innovate
new products that
people want

Equit
y

Capitali

Private businesses
will be owned by
private individuals

XL. Socialism

XLIX. It is argued that

state ownership
often leads to
inefficiency
because workers
and managers lack
any incentive to
cut costs

L.

Une
mplo
ymen
t

LI.

In capitalist economic
systems, the state
doesnt directly
provide jobs.
Therefore in times of
recession,
unemployment in
capitalist economic
systems can rise to
very high levels

LII.

Employment is
often directed by
the state.
therefore, the state
can provide full
employment even
if workers are not
doing anything
particularly
essential.

LIII.

Price
Contr
ols

LIV.

Prices are
determined by market
forces. Firms with
monopoly power may
be able to exploit
their position and
charge much higher
prices.

LV.

In a state
managed
economy prices
are usually set by
the government
this can lead to
shortages and
surpluses

LVI.
LVII.

LVIII. TYPES OF ECONOMIC SYSTEMS:

LIX.

- Traditional Economy
- Free market/Capitalist Economy
- Planned/Socialist/Command Economy
- Mixed Economy

LX.
LXI.

TRADITIONAL ECONOMY

LXII.

Features:
- existence was primarily based on traditions and customs
- barter was the main form of trading
- individuals existed on a subsistence level
- the decision of what, how and for whom was determined by customs and traditions
- resources were owned or controlled by a sovereign or feudal lord.
Examples of this economic system:
- Remote tribal areas in South America, Africa and Asia

Advantages:
1. Every member of the society knows exactly what they are to do.
2. There is a strong social network.
3. Positions within society are already established.
4. Basic Economic questions are already answered by traditions and customs.
5. Life is generally stable, predictable and continuous.
Disadvantages:
1. This type of society is often very slow to change.
2. It does not take advantage of technological change.
3. There is relatively little promotion of intellectual and scientific development.
4. There is inefficient provision of goods and services.
5. There is inadequate use of skill in relation to the factors of production.
6. No upward movement of labour takes place.

LXIII.
LXIV. FREE MARKET/SOCIALIST ECONOMIC SYSTEM
LXV.

Features:
- The government plays little role in economic activity
- Emphasis is on freedom of the individuals (consumers and producers)
- The private sector (private firms and individuals) answer the basic economic questions.
- There is consumer sovereignty.

- Profit maximization is the main goal in this economy.

- The price mechanism determines price in this economy.
Example of Free Market:
There is no real life example of a purely free market economy, this only exists in theory.

Advantages:
1. Manufacturers are free to produce what the consumers demand and the consumers in
turn are free to spend their money as they see it fit.
2. The decision of what to produce is not controlled by government or any single
individual/firm. Hence, there is greater participation in the decision-making process.
3. A large variety of goods and services are produced to satisfy the needs of consumers.
4. Prices are determined by the forces of demand and supply (the price mechanism).
5. There is freedom from government interference.
6. Efficient production is promoted since resources are allocated to their most profitable
use.
7. Competition among firms improves quality, keeps prices low and spurs new technology
and innovation.
Disadvantages:
1. Since the making of profits is the dominant motive of the private sector, only goods and
services that yield the highest profit will be produced.
2. Since there is no government intervention in this type of system, consumer could be
exploited through the charging of high prices for essential goods and services.
3. This system leads to great inequalities as the few rich get richer and the many poor get
poorer.
4. There is much pollution associated with this system especially when industrialization
begins to develop.
5. There tends to be an over-consumption of demerit goods such as alcohol, cigarettes
and drugs.

LXVI.
LXVII.

PLANNED/COMMAND ECONOMIC SYSTEM

LXVIII. Features:
In this type of economy the state:
- controls all economic activity
- makes all decisions regarding economic activities
- decides what goods are produced, how much of each good to produce and how much the
people should get.
Examples of this economic systems:

- The former Soviet Union (now 15 countries including Russia and Ukraine) dismantled
their planned economies from 1990.
- China until the 1980s and 1990s
- Cuba until the 1990s
- North Korea present day

Advantages:
1. The welfare of all citizens is the primary goal
2. Full employment of all available resources
3. Government possess the information to be able to direct resources where they are most
needed.
4. Wasteful competition is avoided
5. There is no industrial unrest such as striking, as the government controls wages
6. Greater emphasis on quality of life than on quantity produced.
Disadvantages:
1. No freedom of choice for consumers or producers
2. System is too rigid to adjust when changes occur, can result in shortages
3. Lack of incentive for workers results in low morale and efficiency. Managers also are not
motivated.
4. There are too many officials, and too much unnecessary procedure and paperwork (redtape or bureaucracy)
5. Conflicts of interests can arise because what the country needs may not be what the
people want.
6. There is wastage of manpower because large numbers of people are required for central
planning.

LXIX.
LXX. MIXED ECONOMIC SYSTEM
LXXI.

Features:
- Economic decisions are taken by the price mechanism system and also by the state
- The private business sector operates along the lines of the free market economy, where
the price mechanism determines allocation of resources.
- The aim of the private sector is to maximise profits while the aim of the public sector is
to maximise social welfare
- The public sector produces goods and services that the private sector is unable or
unwilling to produce, with a bureaucratic set up like the planned economy
Examples:
- Caribbean Region

- United States of America

Advantages:
1. The state can intervene in areas of the economy through the passing of laws to protect
citizens from unfair trading practices.
2. Both the government and the private sector can cooperate in offering certain services;
e.g. transportation, health care.

Disadvantages:
1. Too much government regulation may dampen the free enterprise spirit.
2. Some state-owned industries are allowed to operate inefficiently, thus wasting
resources.
3. Where government intervenes in the market by setting maximum and minimum prices,
this may cause excess demand or supply, which may be difficult to regulate in the longrun.
4. Since the private sector helps to answer the economic questions, there can be the
creation of monopolies.
5. Inequitable distribution of wealth can also arise.

LXXII.
LXXIII.
LXXIV.
LXXV.
LXXVI.
LXXVII.
LXXVIII.
LXXIX.
LXXX.
LXXXI.
LXXXII.

LXXXIII. ECONOMISTS AND THEIR THEORIES:

1. Adam Smith
LXXXIV. Adam Smith advanced the idea of Absolute Advantage Theory which refers to the
ability of a party to produce a particular good at a lower absolute cost than the other. He proposed
two requirements in his system: the market must be free from government intervention and
competition must be in full range. He believed that producers, in order to earn profit, provide right
goods and services as a consequence of market forces. Without government intervention, he further
argued, a laissez faire environment is possible where competition exists to cater for organized
production to suit the public. Hence, an increase in public well being is inevitable. He introduced the
basis of the free market economy competition would benefit both the producers and consumers.
He concluded that the greater the competition, the greater the producers profit. According to him,
when there is competition, the prices of commodity tend to decrease which result to more demands
and thus would mean more profit.

LXXXV.
2. David Ricardo
LXXXVI. David Ricardo is most remembered for his Theory of Comparative Advantage which
explains how trade can create value for both parties even when one can produce all goods, with
fewer resources than the other. He termed the net benefits of such an outcome as gain from trade .
His basic definition of comparative advantage is the ability of an individual, a firm or a country to
produce a particular good or service at a lower marginal cost and opportunity cost than another
country. He contributed the doctrine of fiscal equivalence which is an economic theory that
suggests that the governments initiative to increase debt-financed government spending for the
purpose of stimulating demand do not actually affect the demand due to the publics consciousness
to save excess money for the payment of future tax increases in lieu of the debt settlement. He
established the Theory of Rent which is directly tied to the marginal productivity of the land. The
basis of this theory is his analogy that population growth equals more mouth to feed, more mouth to
feed equals the need for more grains and the need for more grains equals the need for more land.
This led to the view that an increase in food cost, salary and profit is an advantage for the land
owners while the case is otherwise for the capitalist. The Theory of Value which is tied directly to
labor cost is another Ricardian principle. It states an direct proportion between price of goods and
the natural price of labor. He claimed that labor like all other goods which are purchased and sold, or
which may increased or decreased in quantity, has its natural price and market price. The natural
price of labor is the price which is necessary to enable constant subsistence and perpetuation.
Finally, he postulated the Theory of Distribution which is inextricably linked to the theories of rent
and value. He pointed out that the return of the land is not constant as the amount of capital
available does not equate to similar growth rate, the land suffers from diminishing returns. The
maximum level of
LXXXVII. economic rent results from the marginal cultivation of the land.

3. Thomas Malthus
LXXXVIII. Thomas Malthus had two major contributions to the modern economic system: the
population theory and the theory of market gluts. The Population Theory had great in influence on
both Charles Darwin and Alfred Wallace as this theory led to the formulation of the theory of natural
selection. The basis of this theory is the assumption that the power of population supersedes the
power of the earth to provide subsistence for man. The argument that the passion between sexes is
an inevitable phenomenon projects dramatic growth in population which bring about shortage in
food supply. However, population can be controlled either naturally or by the aid of human measures.

The natural factors are disease, food shortage and death due to starvation while the human
measures are infanticide, abortion, delay in marriage and strict rules on celibacy. On condition that
the population is uncontrolled, agricultural production is on the increase to provide for over
population and food shortage. In order to validate this theory on moral grounds he maintains the
thought that suffering is a way of making human beings realize the virtues of hard work and moral
behavior. He also noted that such kind of suffering due to over population is an expected outcome.
On the other hand, the Theory of Market Gluts is centered on the factors of wealth and poverty,
which gave light to the recognition of the key to the accumulation of capital in the distribution of
income. Gluts are consequences of a decline in profits brought about by insufficient demand. The
reason for such insufficiency is the disproportion in the income distribution. In view of this, saving by
capitalists results to demand reduction; consumption by landlords increases demand. Therefore, a
redistribution of income from landlords to capitalists precipitates crisis. In order to eliminate gluts and
promote economic growth Malthus advocates redistributing income to the renter and increasing
government spending. He believes that the capitalists produce more than they consume so that the
LXXXIX. landlords can consume more than they produce.

4. John Stuart Mill

XC.
John Stuart Mill wrote the Principles of Political Economy, which became the leading
economic textbook for forty years after it was written. He elaborated on the ideas of David Ricardo
and Adam Smith. He helped develop the ideas of economies of scale, opportunity cost and
comparative
XCI.
advantage in trade.
XCII.
Mills analysis is fundamentally grounded in his broader approach to economics the
view that economic activity is only a part of all activities or basically termed as Mills Economics .
Firstly, Mill identified that two forces: competition and custom, govern the distribution of income, and
he criticized the orthodox line of English economists for emphasizing the role of competition while
almost completely neglecting the role of custom. He pointed out that the operation of competition in
the market economy is comparatively young historical phenomenon and that, if we glance backward,
we find that custom has traditionally played a major role in solving the economic problems
XCIII.
surrounding the distribution of income.

5. Karl Marx
XCIV.
Karl Marx believes that the basic determining factor of human history is Economics. He
advanced the idea that exchanges of equal value for equal value is fundamental to an ideal
economic system where the amount of work put into whatever is being produced is the determinant
of value. He absolutely disagreed with capitalism which he described as profit motivated a desire
to produce an uneven exchange of lesser value for greater value. So his belief had a great influence
on communism, where all the factors of production and all the industries are owned and managed by
the state. This is also known as command economy, where private property ownership is not
allowed. Economics, then, are what constitute the base of all of human life and history generating
division of labor, class struggle, and all the social institutions which are supposed to maintain the
status quo. Those social institutions are a superstructure built upon the base of economics, totally
dependent upon material and economic realities but nothing else. All of the institutions which are
prominent in our daily lives marriage, church, government, arts, etc. can only be truly
XCV.
understood when examined in relation to economic forces.

6. Leon Walras

XCVI.
Leon Walras biggest contribution in economics is the General Equilibrium Theory and
he is also one of the founders of the marginal revolution by postulating the idea of marginal utility.
The general equilibrium theory studies the fundamentals of supply and demand in an economy with
multiple markets, with the objective of proving that all prices are at equilibrium. This theory analyzes
the mechanism by which the choices of economic agents are coordinated across markets. It
attempts to look at several markets simultaneously rather than a single market in isolation. On the
other hand, marginal utility is defined as the additional satisfaction or benefit that a consumer derives
from buying an additional unit of a commodity or service. The concept implies that the utility or
benefit to a consumer of an additional; unit of a product is inversely related to the number of units of
XCVII. that product he already owns.

7. Alfred Marshall
XCVIII.
Alfred Marshalls main argument is that the economy is an evolutionary process in
which technology, market institutions and peoples preferences evolve along with peoples behavior.
He introduced the idea of 3 periods namely, Market Period, Short Period and Long Period, to
understand how markets adjust to changes in supply or demand over time. Market Period is the
amount of time for which the stock or commodity is fixed. Meanwhile, the time in which the supply
can be increased by adding labor and other inputs but not adding capital is known as Short Period.
Lastly, Long Period means the amount of time taken for capital to be increased. Marshalls basic
approach to welfare economic still stands today. In his most important book, Principles of
Economics, he was able to quantify the buyers sensitivity to price. He emphasized that the supply
and demand determines the price output of a good: the two curves are like scissor blades that
intersect at equilibrium. This concept is otherwise known as Price Elasticity of Demand. He proposed
that the price is basically parallel for each unit of commodity that a consumer buys, but the value to
the consumer of each additional unit declines. In line with this he illustrated the benefits of the
consumer from market surplus. He termed these benefits as Consumer Surplus which is equated as
the size of the benefit equals the difference between the consumers value of all the units and the
amount paid for the units. In other words, the consumers pay less than the value of the good to
themselves. Lastly, he also introduced the concept of Producer Surplus which is the amount the
XCIX.
producer is actually paid minus the amount that he would willingly accept.

8. Thorstein Veblen
C. Thorstein Veblens greatest contribution to economics is the introduction of the concept,
conspicuous consumption. In his widely known book, The Theory of Leisure Class , he defined
conspicuous consumption as the consumption undertaken to make a statement to others about
ones class or accomplishments. He broadened the views of other economists regarding
understanding the social and cultural causes and effects of economic changes. He advocated the
identification of the causes and effects of shifting from one source of income to another.

9. John Meynard Kenes

CI.
John Meynard Keynes revolutionized the economists conceptions about economics.
Keynes General Theory of Employment, Interest and Money, for instance, introduced the notion of
aggregate demand as the sum of consumption, investment and government spending. His reason is
that it is apparent that maintenance of full employment mainly depends on the support of
government spending. Although his thought was not favored by economists he argued that his
theory aim to stabilize wages. Moreover, his insight was that a general cut of wages tends to
decrease income, consumption and aggregate demands which lead to positive contributions of lower
price of labor. This theory advocated deficit spending during economic downturns to maintain full

employment. Keynes believed in monetarism or the quantity theory of money. His major policy view
was that the approach to uphold economic stability is to stabilize the price level, and that to reach
the possibility, there is a need for the governments central bank to lower the interest rates when
prices tend to rise and raise when prices tend to fall. In his eloquent book entitled, The Economic
Consequences of the Peace, he wrote an excellent economic analysis of reparations. This book
also contains an insightful analysis of the Council of Four (Georges Clemenceau of France, Prime
Minister David Lloyd George of Britain, President Woodrow Wilson of the United States, and Vittorio
Orlando of Italy). Keynes was one of the advocates of the postwar system of fixed exchange rates.

10. Irving Fisher

CII.
Irving Fisher pioneered the construction and the use of price indexes. His own Index
Number Institute computed price indexes worldwide from 1923 to 1936. He also initiated the clear
distinction between real and nominal interest rates which is still the basic principle in modern
economy. He pointed out that the real interest rate is equal to the nominal interest rest minus the
expected inflation rate. He was also a founder or president of numerous associations and agencies
including the Econometric Society and the American Economic Association. Fisher advocated a
more modern quantity theory of money which functions reasonably well in assuming the consistency
of economy. He formulated his theory in terms of the equation of exchange, which says that MV =
PT, where M equals the stock of money; V equals velocity or the speed of money circulation in an
economy; P equals the price level; and T equals the total volume of transactions. Moreover, the
contemporary economic models of interest are based on Fisherian principles. For one, Fishers
principle of money and prices conceptualized monetarism. He called interest an index of a
communitys preference for a dollar of present income over a dollar of future income. He
postulated that Interest rates result from the interaction of two forces: the time preference and the
Investment Opportunity Principle (the present income investment will yield more future income
investment). His Capital theory which states that the value of capital is the present value of the flow
of income that the asset generates is still widely held these days. His reasoning on consumption
taxes to replace conventional income taxation gave light to double taxation of savings, and clearly
became an insight to understand that this double taxation biases the tax code against saving and in
favor of consumption.