Question

1. What are the values or criteria in political economy that we use to judge the merits of an economic system? Explain the meaning of each, and for each criterion give an example of an economic system which does not meet the criterion.

Answer:

2. Distinguish between Pareto optimality and efficiency.

Answer:

3. What are the three central assumptions of neoclassical economics?

Answer:

Answer 1

1)

Political economy means, is the study of production and trade and their relations with law, custom and government and with the distribution of wealth and national income. It originated in moral philosophy in the 18th century.

Political economicsts study how economic theories like socialism, capitalism and communism work in the real world. The political economy embodies the complex political nature of decision making to investigate how power and authority in a society affect economic choice. Political economy analysis does no provide immediate solutions but leads to better intervention.

By studying political economy we can understand the positive aspects of economic system. Because the political economy and the economic system are intertwined.

An economic system is the production, resources allocation and distribution of goods and services in a community or a specific Geographic area. The dominant form of economic organisations in the today is based on a market -based mixed economy.

2)

Pareto Optimslity is a situation where no individual or preference criteria can be better of without making at least one individual or preference criterion worse off. Economic efficiency is when all the goods and production components of an economy are supplied for their most valuable use or when waste is eliminated or minimized.

3)

• people have rational preferences
• Maximum utility -individul, maximum utility -firms
• People act independently on the basis of full and relevant information.