THE INDUSTRIAL REVOLUTION AND CLASSICAL ECONOMICS ADAM SMITH AND THE CLASSICAL SCHOOL DAVID RICARDO & THE THEORY OF COMPARATIVE ADVANTAGE THOMAS ROBERT MALTHUS & THE PRINCIPLE OF POPULATION MARGINALIST SCHOOL THE MARXIST ECONOMICS

SELF-INTEREST OF MAN IS CONSTRAINED BY THE COMMON GOOD (MORALITY)

WHICH IS MORE IMPORTANT? LABOR, CAPITAL, OR LAND? CREATIVITY & PRODUCTIVITY OF THE MIND

PHYSIOCRATS (LAND) VS MORALISTS (WORKERS) –ADAM SMITH

INCREASE IN WAGES = INCREASE IN PRODUCTIVITY OF WORKERS

CURE TO PRODUCT SHORTAGE? PRODUCERS EXIT THE MARKET INCREASE IN PRICE ZERO PROFIT? PRODUCERS EXIT THE MARKET

Invisible hand = efficient allocation of resources through the price mechanism

ADAM SMITH

ADAM SMITH & THE CLASSICAL SCHOOL ↑production Division of labor Self-interest: constrained by morality, markets, and government ↑ wage = ↑production Product shortage ↑price ↑profit ↑production ↓product shortage ↑producers = competition ↓price ↓profit ↓producers

INCREASE IN PRODUCTIVITY = SPECIALIZATION OF PRODUCTS = INCREASE IN PROFIT = TRADE (OPPORTUNITY COST IS ELIMINATED)

COST OF GIVING UP AN ALTERNATIVE SELECTING THE BEST CHOICE MEANS OTHER OPTIONS ARE FOREGONE “TO GIVE UP SOMETHING IN ORDER TO GET ANOTHER (TRADE-OFF)”

Point in which the economy is most efficiently producing its goods and services

DAVID RICARDO

GEOMETRIC RATE: 2,4,6,8 GEOMETRIC RATE: 2,4,6,8 ARITHMETIC RATE: 1,2,3,4

INCREASE IN NUMBER OF CONSUMERS LIMITED RESOURCES INCREASE IN NUMBER OF CONSUMERS

POTENTIAL RETURNS JUSTIFY THE INVESTMENT (TIME, MONEY, ENERGY)?

Law of Diminishing Returns IF ONE FACTOR OF PRODUCTION IS INCREASED WHILE OTHER FACTORS ARE THE SAME (HELD CONSTANT) Law of Diminishing Returns OUTPUT OF PRODUCTION = DECREASES INPUT OF PRODUCTION (FACTORS OF PRODUCTION) = INCREASES

MARKET’S EFFICIENCY = ALLOCATION OF RESOURCES SOLUTION? INTERVENTION OF STATE MARKET’S DEFICIENCY = DISTRIBUTION OF INCOME

MARGINALISTS: DECISIONS ARE MADE ON THE MARGIN PRICES ARE DETERMINED: BY THE (1) COST OF PRODUCTION, (2) LEVEL OF CONSUMER SATISFACTION (subjective valuation; e.g. water in the desert vs. diamond) TO EXPLAIN THE DISCREPANCY IN THE VALUE OF GOODS AND SERVICES BY REFERENCE TO THEIR UTILITY Determined by how much additional utility an extra unit of a good or a service provides.

PRINCIPLE OF WATER-DIAMOND PARADOX: INDIVIDUAL UNITS OF DIAMONDS ARE FAR MORE VALUABLE THAN INDIVIDUAL UNITS OF WATER PRICE INCREASES = HOW THE COMMODITY WAS PRODUCED AND WILL BE USED (SATISFACTION)

→ Man → World → School → Work → Death → ? → MARX → Loss of Meaning → ↑Meaning in life: free time Framework: loss & gain State → → → Businessmen Recovery? → Capitalist → → Exploitation/ Suffering → Workers → Class Structure Thesis: Bourgeois (Capitalist) Antithesis: revolution Parts: Replaceable Alienation/ separation → Synthesis: Communist Society → → Worker to the product/ activities No Private Ownership Religion: Opium SOCIALISM: no private individual would own the “means of production” but the community as a whole Wealth and power will be equally shared by all

NEO-CLASSICAL ECONOMICS ALFRED MARSHALL INSTITUTIONALISTS KEYNESIAN ECONOMICS (JOHN MAYNARD KEYNES)

SPECIALIZATION: MICROECONOMICS Study of individual choice and firms and builds up from there to an analysis of the whole economy Pricing policies of firms Households’ decisions on what to buy FROM PARTS TO WHOLE WHOLE TO PARTS: MACROECONOMICS INFLATION, UNEMPLOYMENT, ECONOMIC GROWTH

Price and output of a good were determined by supply and demand Price elasticity of demand Consumer Surplus

PRICE: DETERMINED BY SUPPLY AND DEMAND PRICE ELASTICITY OF DEMAND: BUYERS’ SENSITIVITY TO PRICE

consumer satisfaction in terms of utility. CONSUMER SURPLUS: consumer is willing to pay more for a given product than the current market price. difference between the maximum price a consumer is willing to pay and the actual price he does pay consumer satisfaction in terms of utility.

BUDGET: P 1500 CONSUMER SURPLUS? Consumer surplus is the difference between what you are willing to pay and what you actually pay. P 400 P 800

Scenario 1: Imagine you are sitting at home and decide that you are going to buy a new computer. You then decide that for the features you need you are willing to spend up to P50,000; that is you have set yourself a budget of p50,000. So the next day you go down to the computer store and find a computer with all the features you wanted for p40,000. This meant you spent P10,000 less than your budget. Refer to scenario 1. What is the consumer surplus here? Why? Describe the concept of consumer surplus using the video (tawad-pataas).

3 PERIODS OF HOW MARKETS ADJUST TO SUPPLY & DEMAND (Alfred Marshall) MARKET PERIOD SHORT PERIOD LONG PERIOD

MARKET PERIOD 3210 – 1999: P10,000 + P1k (sim card) Price is the same as long as there is demand SHORT PERIOD 3210 – DECEMBER 1999: p5,000 Last series of increase in production Investment decreases & demand might subsequently be low LONG PERIOD 3210 – DEMAND?: PRICE? Time to take if there’s a need to continue production (people’s preference evolve)

INSTITUTIONALISTS VS. LAISSEZ-FAIRE GOVERNMENT SHOULD CONTROL THE SOCIETY FOR THEY CAN BRING ABOUT THE NEEDED SOCIAL CHANGE

EMPLOYMENT = GOVERNMENT SPENDING = TAX DECREASE INCOME = DECREASE IN SPENDING = FEW TAX INCREASE IN UNEMPLOYMENT = DEPRESSION

MACROECONOMICS = INFLATION & UNEMPLOYMENT SAVING VS INVESTMENT = INCREASE IN INCOME AND EMPLOYMENT

Aggregate demand is influenced by monetary and fiscal policies

Closed Notes (Assign. Next meeting) Demonstration effect (1 local ad) Engel’s Law & 1 applicable job Positive & Normative Economics Service vs Good (Consumer, Capital, Essential, Luxury, Economic, Free) Economy types: (Traditional, Command, Market, Mixed) Production possibility frontier (PPF) Economic circular flow (inflow & outflow of money)