3. Wealth G 3 / 1 GENERAL ECONOMICS 5 Copyright Mark Van Couwenberghe, 2017-2018

3.0 OVERVIEW G 3 / 2 3.1 WEALTH: WHAT? page G 3 / 3 3.2 WELL-BEING: WHAT? page G 3 / 4 3.3 WEALTH THEORY 1: SMITH page G 3 / 5 3.4 WEALTH THEORY 2: PARETO page G 3 / 9 3.5 WEALTH THEORY 3: MARSHALL page G 3 / 13 3.6 WEALTH LOSS IN MONOPOLIES page G 3 / 18 3.7 EXERCISES page G 3 / 20 3.8 VOCABULARY page G 3 / 22 Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 3 3.1 WEALTH: WHAT? Wealth can be defined as the “means” or “resources” that are available to consumers to buy scarce products and services, and that are available to suppliers to supply scarce products and services Examples: Consumers experience wealth when they have the income to buy a new car, on top of all the necessary purchases (households who have the means to buy these goods experience wealth) Suppliers experience wealth when they generate profit that enables them to make extra investments to grow and offer more products (companies who have the means to invest experience wealth) Wealth has a monetary value Later on, we will come back to how wealth is measured from a macroeconomic perspective (GDP) Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 4 3.2 WELL-BEING: WHAT? Well-being can be defined in general as a “positive” condition of an individual or group of individuals Examples: An individual experiences well-being when he/she has the possibilities to practice his/her hobbies and feels “personal happiness and satisfaction” in doing this A community experiences well-being when it can benefit from a clean environment and feels a high quality of life as a result from this Well-being is mostly “subjective”, although economic science offers measures for well-being (see later) Both wealth and well-being lead to a level of satisfaction: Wealth has a monetary value Well-being has a subjective value (it deals with psychology, emotions, feelings, …) Wealth and well-being are linked to each other Explain: Copyright Mark Van Couwenberghe, 2017-2018

3.3 WEALTH THEORY 1: SMITH G 3 / 5 Adam Smith 1723 - 1790 Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 6 Fill-in the passport of Adam Smith: ADAM SMITH Nationality Occupation Most important theory Most important publication Nickname Relevance in 21st century Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 7 Read the following statement of Smith: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Explanation: this statement reveals the theory of the “invisible hand” that states that if each consumer is allowed to choose freely what to buy and each supplier is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and therefore to the community/economy as a whole In other words: full competitive markets (without any government intervention) lead to maximum wealth Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 8 Explain Smith’s theory using the supply and demand model: Explanation: situation 1 P e situation 2 Q e Copyright Mark Van Couwenberghe, 2017-2018

3.4 WEALTH THEORY 2: PARETO G 3 / 9 Vilfredo Pareto 1848 - 1923 Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 10 Fill-in the passport of Vilfredo Pareto: VILFREDO PARETO Nationality Occupation Most important theory Most important publication Relevance in 21st century Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 11 Read the following statement of Pareto: “The market equilibrium is a state of wealth from which it is impossible to increase wealth so as to make any one individual better off without making at least one individual worse off” Explanation: this statement supports a case for non-intervention: let the markets do the work and the outcome will be Pareto efficient: no consumer/supplier can be made better off without some other consumer/supplier being made worse off. In other words: full competitive markets (without any government intervention) lead to maximum wealth = Pareto optimum or Pareto efficiency Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 12 Explain Pareto’s theory using the supply and demand model: Explanation: situation 1 P e situation 2 Q e Copyright Mark Van Couwenberghe, 2017-2018

3.5 WEALTH THEORY 3: MARSHALL G 3 / 13 3.5 WEALTH THEORY 3: MARSHALL Alfred Marshall 1842 - 1924 Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 14 Fill-in the passport of Alfred Marshall: VILFREDO PARETO Nationality Occupation Most important theory Most important publication Relevance in 21st century Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 15 Read the following statement of Marshall: “The equilibrium price in a full competitive market is the price a consumer actually has to pay to get a product/service, it is the price a supplier actually receives. Some consumers are willing to pay more than the market price. The difference between the willingness to pay and the actual market price creates a surplus for the consumer. This wealth is called “consumer surplus”. Some suppliers are willing to offer products/services at a price that is lower than the market price. The difference between the actual market price and the willingness to offer creates a surplus for the supplier. This wealth is called “producer surplus”. The total wealth in the economy is the sum of consumer surplus CS and producer surplus PS . The CS and PS are at the maximum level in the market equilibrium.” In other words: Full competitive markets (without any government intervention) lead to maximum wealth Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 16 This is the visualization of Marshall’s theory: Explanation: P e Q e Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 17 The following formulas can be used to calculate CS, PS and total wealth (TW): CS = ( P (Qd = 0) - P e ) . Q e _________________________ 2 PS = ( P e - P (Qs = 0) ) . Q e ________________________ TW = CS + PS Copyright Mark Van Couwenberghe, 2017-2018

3.6 WEALTH LOSS IN MONOPOLIES G 3 / 18 3.6 WEALTH LOSS IN MONOPOLIES Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 19 Comments: Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 20 3.7 EXERCISES 1) Consider a full competitive market. This is the demand curve: Q = 40 - 2 . P and this is the supply curve: Q = P - 2 Calculate CS Calculate PS Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 21 Calculate TW 2) Discuss the wealth theories of Smith, Pareto and Marshall and write-down some elements of criticism: Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 22 3.8 VOCABULARY EN NL Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 23 EN NL Copyright Mark Van Couwenberghe, 2017-2018

G 3 / 24 EN NL Copyright Mark Van Couwenberghe, 2017-2018