Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Wednesday, 12 October 2011



His real name is Paul Anthony Samuelson, was an American economist. He was born in Gary, Indiana, on May 15,1915 to Frank Samuelson, a pharmacist, and the former Ella Lipton. In 1923, Samuelson moved to Chicago; he studied at the University of Chicago and received Bachelor of Arts degree in 1935.Then, he completed his Master of Arts degree in 1936,Doctor of Philosophy in 1941 at Harvard University. As a graduate student at Harvard, Samuelson studied economics under Joseph Schumpeter, Wassily Leontief, Gottfried Haberler, and the “American Keynes” Alvin Hansen. He also comes from a family of well- known economists, including his brother Robert Summers, sister-in-law Anita Summers, and nephew Larry Summers.
During his 7 decades as an economist, Samuelson’s professional positions included:

  • Assistant Professor of Economics at M.I.T,1940,Associate Professor,1944.
  • Member of the Radiation Laboratory 1944-1945.
  • Professor of International Economic Relations (part-time) at the Fletcher School of Law and Diplomacy in 1945.
  • Guggenheim Fellowship from 1948 to 1949.
  • Professor of Economics at M.I.T. beginning in 1947 and Institute professor beginning  in 1962.
  • Vernon F. Taylor Visiting Distinguished Professor at Trinity University (Texas) in Spring 1989.

Samuelson died after a brief illness on December 13,2009, at the age of 94.His death was announced by the Massachusetts Institute of Technology (MIT).

Susan Hockfield, the president of MIT, said that Samuelson “transformed everything he touched: the theoretical foundations of his field, the way economics was taught around the world, the ethos and stature of his department, the investment practices of MIT, and the lives of his colleagues and students”.


Samuelson worked in many fields including:
§ Welfare economics, in which he popularised  the Lindahl-Bowen-Samuelson onditions(criteria for deciding whether an action will improve welfare) and demonstrated in 1950 the insufficiency of a national-income index to reveal which of two social options was uniformly outside the others (feasible) possibility function(Collected Scientific Papers, v. 2,ch. 77;Fischer,1987, p. 236).

§  Public finance theory, in which he is particularly known for his work on determining the optimal allocation of resources in the presence of both public goods and private goods.
§  International economics, where he influenced the development of two important international trade models: the Balassa-Samuelson effect, and the Heckscher-Ohlin model(with the Stolper-Samuelson theorem).

§  Macroeconomics, where he popularized the overlapping generations model as a way to analyze economic agents behaviour across multiple periods of time(Collected Scientific Papers,v.1, ch. 21).

§  Consumer theory, he pioneered the Revealed Preference Theory, which is a method by which it is possible to discern the best possible option, and thus define consumer’s utility functions, by observing the consumer behaviour.


*    Neoclassical Synthesis

Neoclassical synthesis is a power academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics. Mainstream economics is largely dominated by the resulting synthesis, being largely Keynesian in macroeconomics and neoclassical in microeconomics.

he theory was mainly developed by John Hicks, and popularized by the mathematical economist Paul Samuelson, who seems to have coined the term, and helped disseminate the “synthesis”, partly through his technical writing and in his influential textbook, Economics. The process began soon after the publication of Keynes’ General Theory with the IS/LM model first presented by John Hicks in a 1937 article. It continued with adaptations of the supply and demand model of markets to Keynesian theory. It represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices(as costs) and income affect quality demanded.

 Mathematical Economics

In the late 1930s, economists saw the wider use of a broad array of mathematical tools, including convex sets and graph theory. Mathematicians began to discuss economic problems as a means to advance the state of pure mathematics in the same sense that solutions to problems in physics led to advancement in the underlying mathematics.

Vilfredo Pareto analyzed microeconomics by treating decisions by economic actors as attempts to change a given allotment of goods to another, more preferred allotment. Sets of allocations could then be treated as Pareto efficient (Pareto optimal is an equivalent term) when no exchanges could occur between actors that could make at least one individual better off without making any other individual worse off. Pareto's proof is commonly conflated with Walrassian equilibrium or informally ascribed to Adam Smith's Invisible hand hypothesis. Rather, Pareto's statement was the first formal assertion of what would be known as the first fundamental theorem of welfare economics. These models lacked the inequalities of the next generation of mathematical economics.

In the landmark treatise Foundations of Economic Analysis (1947), Paul Samuelson identified a common paradigm and mathematical structure across multiple fields in the subject, building on previous work by Alfred Marshall. Foundations took mathematical concepts from physics and applied them to economic problems.

This broad view (for example, comparing Le Chatelier's principle to t√Ętonnement) drives the fundamental premise of mathematical economics: systems of economic actors may be modeled and their behavior described much like any other system. This extension followed on the work of the marginalists in the previous century and extended it significantly. Samuelson approached the problems of applying individual utility maximization over aggregate groups with comparative statics, which compares two different equilibrium states after an exogenous change in a variable. This and other methods in the book provided the foundation for mathematical economics in the 20th century.

Revealed Preference Theory

Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory came about because the theories of consumer demand were based on a diminishing marginal rate of substitution (MRS). This diminishing MRS is based on the assumption that consumers make consumption decisions based on their intent to maximize their utility. While utility maximization was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by creating a means to define utility functions by observing behavior.

The revealed preference theory is trying to understand the preferences of a consumer among bundles of goods available to him, given his budget constraint. For instance, if the consumer buys the bundle of goods A over the bundle of goods B, where both the bundles of goods are affordable, it is said that A is directly revealed preferred over B. It is assumed that the consumer's preferences are stable over the observed time period, i.e. the consumer will not reverse his relative preferences regarding A and B.

As a concrete example, if a person chooses the bundle {2 apples, 3 bananas} over an affordable alternative {3 apples, 2 bananas}, then we say that the first bundle is revealed preferred to the second. It is assumed that the first bundle of goods is always preferred to the second, and that the consumer purchases the second bundle of goods only if the first bundle becomes unaffordable.

This assumption implies that preferences are transitive. In other words, if we have bundles A, B, C, ..., Z, and A is revealed preferred to B, which is in turn revealed preferred to C and so on, then it follows that A is revealed preferred to C through Z. Under these hypotheses, economists are able to chart indifference curves which are employed in many models of consumer theory.

Algebric Analysis
Let there be 2 bundles of goods (x1,x2) and (y1,y2) available at price (p1,p2),assuming that the consumer has an income 'm'. It is observed that the consumer buys (x1,x2) bundle of goods. To translate this arithematically following equation is formulated p1y1+p2y2<m or  p1y1+p2y2=mThe above equation indicates that the bundle of goods (y1,y2) satisfies the budget constraint or in other words (y1,y2) is affordable by the consumer.But it is already stated that the consumer buys (x1,x2) bundle of goods,which implies  p1x1+p2x2=mthe above equation also satisfies the condition of the bundle of goods being affordable within the budget constraint and in this case it satisfies the condition with equality.Now, putting the above equations together, knowning that the bundle of goods (y1,y2) was affordable at the given budget constraint(p1,p2,m) the consumer bought (x1,x2) bundle of goods , thus the final equation of revealed preference is as stated below p1x1+p2x2>p1y1+p2y2 from the preceding equation we derive that the ,consumer prefers bundle of goods (x1,x2) over bundle of goods (y1,y2) or we can say that bundle of goods (x1,x2) is directly revealed preferred to (y1,y2). 

The weak axiom of revealed preference
The weak axiom of revealed preference (WARP) is a characteristic on the choice behavior of an economic agent.The weak axiom of revealed preference states that if a consumer prefers bundle of good "A" over bundle of good "B" it will never happen so that in any situation where ,both "A" and "B" are present the consumer chooses bundle of good "B", we can also say that when good"A" is revealed prefered to good "B" good "B" will never be revealed prefered to good "A". For example, if an individual chooses orange out of a set of options including apple, they should never choose apple when faced with a choice of a different set of options which also includes orange and apple. More formally, if Apple is ever chosen when orange is available, then there can be no set containing both alternatives from which apple is chosen and orange is not. These two definitions however do not state the same necessary restrictions to satisfy WARP. The former prohibits ever choosing apple after orange was once chosen over aaple. The latter (and weaker rectriction) only requires to choose orange as well, if apple were to be chosen out of several choices.This characteristic can be stated as a characteristic of Walrasian demand functions as seen in the following example. Let pa be the price of apples and pb be the price of bananas, and let the amount of money available be m=5. If pa =1 and pb=1, and if the bundle (2,3) is chosen, it is said that the bundle (2,3) is revealed preferred to (3,2), as the latter bundle could have been chosen as well at the given prices. More formally, assume a consumer has a demand function x such that they choose bundles x(p,w) and x(p',w') when faced with price-wealth situations (p,w) and (p',w') respectively. If p·x(p',w') ≤ w then the consumer chooses x(p,w) even when x(p',w') was available under prices p at wealth w, so x(p,w) must be preferred to x(p',w').

The strong axiom of revealed preference
The strong axiom of revealed preference (SARP) is an expansion of the concept of the weak axiom. A choice behavior that satisfies the weak axiom can form circles. That is if A is preferred to B and B to C then under the weak axiom it is possible that C is preferred to A. The strong axiom makes this behavior impossible, as it is the same as weak axiom plus the requirement that circles are not possible. (In two dimensions WARP=SARP).

   International Trade

International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labour are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. One report in 2010 suggested that international trade was increased positively when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country. 

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

prepare by
1. Nur Ain Ibrahim
2. Nur Aini Ibrahim
3. NurAmirah Din
4. Surnini Osman