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JOINT PRODUCTION: The simultaneous production of two or more goods from the same resource. For example the production of beef also results in the production of leather and the production of lumber also results in the production of sawdust. Joint production can be beneficial, that is, giving a producer multiple products to sell. But it can also be problematic when one of the joint products is undesirable, such as pollution or waste residuals.
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                           ASSUMPTIONS, KEYNESIAN ECONOMICS: The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production. Like any economic theory, Keynesian economics relies on a set of fundamental assumptions. The three most noted assumptions are rigid or flexible prices',500,400)">inflexible prices, effective demand, and important savings and investment determinants other than the interest rate. These three assumptions are in direct contrast, and in response, to three assumptions underlying classical economics--flexible prices, Say's law, and savings-investment equality.Whereas classical economics assumes that prices are flexible and quickly adjust to equilibrium, Keynesian economics assumes that prices are inflexible and do not quickly adjust to equilibrium. Whereas classical economics assumes that supply creates its own demand, termed Say's law, Keynesian economics assumes that demand, especially consumption expenditures, depends on actual income received by the household sector. Whereas classical economics assumes that saving and investment achieve equality through flexible adjustment of the interest rate, Keynesian economics assumes that saving and investment depend on factors other than the interest rate and might not achieve equilibrium. A Keynesian OverviewKeynesian economics can be traced to the pioneering work of John Maynard Keynes (often referred to as the father of macroeconomics). The specific event launching the modern study of macroeconomics and Keynesian economics was the publication by John Maynard Keynes of The General Theory of Employment, Interest and Money in 1936.Keynesian economics dominated the study of economics for 40 years after it was introduced. It fell out of favor in the 1980s largely because it did not adequately explain the simultaneous occurrence of high rates of unemployment and inflation that came to be known as stagflation. Highlights of Keynesian economics include: - One, Keynesian economics offers a theoretical explanation of, and a remedy for, persistent unemployment problems, especially those occurring during the Great Depression.
- Two, the theoretical structure of Keynesian economics is based on a view that the macroeconomy is a distinct entity operating accord a set of principles distinct from those governing microeconomic phenomena. The macroeconomy is more than just a collection of markets.
- Three, these macroeconomic principles of Keynesian economics indicate that aggregated markets, especially resource markets, do not automatically achieve equilibrium, meaning full employment is not guaranteed.
- Four, Keynesian economics indicates that the recommended way to achieve full employment is through government intervention, especially fiscal policy.
Rigid PricesThe first of three key assumptions underlying Keynesian economics is the presumption that prices are inflexible or rigid, especially in the downward direction. This price rigidity is fundamental to the Keynesian implication of sustained unemployment. If prices, especially wages, do not decline, then the resulting labor market surplus means unemployment.Rigid prices can exist for a number of reasons. First, producers often have long-term, multi-year contracts with resource suppliers that specify resource prices. These agreements prevent prices for changing. Second, workers tend to view wages as an indication of intrinsic self-worth and thus resist attempts to lower wages. Workers might opt for temporary unemployment, rather than working at lower wages. Third, the employment and payment system is guided by inertia. Employers are often reluctant to change wages because doing so can be costly. Fourth, firms often reduce employment rather than wages to "clean house" and get rid of the least productive workers. Fifth, many firms, especially small ones, are price takers in resource markets. They have NO control over the resource prices set by the market. Effective DemandThe second key Keynesian assumption is the notion of effective demand, that consumption expenditures are based on the disposable income actually available to the household sector rather than income that would be available at full employment. Effective demand means that people spend the income that they actually have not the income that they could have under other circumstances.This assumption means that changes in income, especially disposable income, are the prime influence on consumption expenditures. If the household sector has more income because the economy is expanding, then they increase consumption expenditures. If the household sector has less income because the economy is contracting and a large group of workers is unemployed, then they decrease consumption expenditures. This effective demand proposition is embodied in a key Keynesian principle, termed the consumption function, which is the relation between household consumption expenditures and household income. More specially, as specified by the so-called psychological law, the consumption function indicates that people use only a fraction of any extra income for consumption. Saving and Investment DeterminantsThe third important Keynesian assumption is that saving and investment are influenced by factors other than the interest rate. These other factors can prevent the equality between saving and investment, or perhaps allow equilibrium ONLY at a negative interest rate. The lack of equality between saving and investment can lead to a cumulatively reinforcing downward spiral of declining production and income.The most important non-interest-rate determinant of household saving is disposable income. As the disposable income changes, not only does the household sector change consumption expenditures, it also changes saving. Keynesian economics assumes that the relation between saving and income is a great deal more important than that between saving and the interest rate. Another key non-interest-rate determinant of saving is expectations. That is, the household is motivated to save in anticipation of future spending (saving for college, saving for retirement, saving to buy a house, etc.), regardless of the interest rate. The most important non-interest-rate determinant of business investment is expectations, especially expectations of future production and profitability. That is, the business sector is primarily motivated to undertake investment expenditures on capital goods if they anticipate a profitable return. A booming economy can ensure profitable returns even with a high interest rate. Moreover, a stagnant economy can prevent profitable returns even with a low interest rate. In fact, the economy might be in such a dismal state that a negative interest rate is needed to entire enough business investment to achieve equality with saving.
 Recommended Citation:ASSUMPTIONS, KEYNESIAN ECONOMICS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: July 2, 2025]. Check Out These Related Terms... | | | | | | | | | | Or For A Little Background... | | | | | | | | | | | | | | | And For Further Study... | | | | | | | | | | | | | |
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Today, you are likely to spend a great deal of time visiting every yard sale in a 30-mile radius wanting to buy either super soft, super cuddly, stuffed animals or a large stuffed brown and white teddy bear. Be on the lookout for door-to-door salesmen. Your Complete Scope
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General Electric is the only stock from the original 1896 Dow Jones Industrial Average remaining in the current index.
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"always remember an epitaph which is in the cemetery at Tombstone, Arizona. It says: „Here lies Jack Williams. He done his damnedest.¾ I think that is the greatest epitaph a man can have ‚ When he gives everything that is in him to do the job he has before him. That is all you can ask of him and that is what I have tried to do. " -- Harry Truman, 33rd US president
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PSID Panel Study of Income Dynamics
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