Unit 1 2024
Uploaded by
masondombongeni256Unit 1 2024
Uploaded by
masondombongeni256ECO11
10F
Nisreen Narker Nisreen.narker@uct.ac.za
Room 2.13 Leslie Commerce
Introduction
What is Economics
LESSON Economic Systems
OVERVIE
GDP and Inequality
W
Capitalism
Gains from trade
INTRO discussion
What are the most
What is pressing problems
economics? economists are
faced with today?
What is
economics?
• Social science that looks
at how societies make
The theories, principles, and
the branch of knowledge
concerned with the
efficient use of scarce
(limited) resources to models that deal with how production, consumption, and
maximise the satisfaction the market process works. It transfer of wealth.
of people’s unlimited attempts to explain how
material wants wealth is created and
Economics is the social distributed in communities,
science that studies the how people allocate
production, distribution, resources that are scarce
and consumption of goods and have many alternative
and services. Economics uses, and other such matters
focuses on the behaviour that arise in dealing with
and interactions of human wants and their
economic agents and how satisfaction.
economies work.
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What do
Economists
study?
• Production of goods & services
• Consumption of goods & services
• What makes a problem an ECONOMIC
one?
• Problem of scarcity and choice
• Needs vs Wants
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Three Basic
Economic Questions
Output question - What to produce
Input question - How to produce
Distribution question - For whom
to produce
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Factors
HOW DOofWE
Production
PRODUCEand rewards
GOODS AND to FOPs
SERVICES?
We identify four factors of production:
•Natural resources – may be renewable or nonrenewable
Land
•Owners of land earn rent
•Time and effort people devote to production
•Linked to the idea of human capital, or the knowledge
Labour and skills obtained from training and experience
•Owners of labour earn wages
•Instruments, tools, machines and buildings
Capital
•NOTE: we are NOT talking about financial capital
(money, stocks) – this is not directly productive
•Owners of capital earn interest
•Organizes land, labour and capital –
generates ideas for production and
Entrepreneurship bears
the risks of business decisions
•Entrepreneurs earn profit
8 8
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Types of output
Types of goods
• Goods:
• Consumer goods vs Capital goods
• Durable goods, e.g. cars, fridges, computers
• Economic vs free
• Semi-durable goods, e.g. clothing, shoes, tyres
• Homogenous vs heterogeneous
• Non-durable goods, e.g. food, cleaning materials
• Services:
• Financial services, e.g. banks, insurance companies
• Personal services, e.g. doctor, lawyer, teacher
• Transport and logistics, e.g. warehousing, trucking
• Wholesale and retail, e.g. supermarket, spaza shop, street vendor
Economic way
of thinking
Scarcity, Choice and Opportunity cost
◦ The cost of making a choice
◦ Choose one thing – choose not to
do/consume/produce something else
◦ Next best alternative (real cost)
◦ What to produce/consume?
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The circular flow
of goods and
services
• What are the real flows?
• What are the money
flows?
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Economic Systems
Method that every society uses to answer the
three basic economic questions.
All societies deal with scarcity…
How do societies aim to address the problem of the
three basic economic questions is described by the
economic system
Two important characteristics to compare economic systems
Property rights
Decision-making process
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Traditional economic system
This was the norm for most of human history (till at least 1750)
The economy was dominated by agriculture/subsistence farming
Extreme poverty was the norm
Ownership of factors of production determined by tradition and hereditary
transfer
Jobs passed from fathers to sons
Practically no technological advancement; anything new was frowned upon
Religious and cultural beliefs trumped economic advancement
Jobs passed from fathers to sons
Highly predictable, but inflexible system
Marx identified a number of stages in this traditional system:
Primitive communism (in hunter/gather communities)
Slavery (in ancient and not so ancient societies
Feudalism (mainly in Europe in the Middle Ages)
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Market economic system
An economic system where private property, markets and firms play a crucial
role
Capitalism started in the late 18th century in England (Industrial revolution)
Caused major disruption to the traditional system that dominated at the
time
Spread to Europe, North America and the rest of the world during the 19 th
and 20th centuries
Capitalism comes in various forms and guises
Large differences between US, and Northern Europe, but all are “capitalist”
Advantages: competition, efficiency (firms produce low price and good quality),
incentives to work hard (motivated by profits).
Disadvantage: does not take equity into account. 14
Command (planned) economic system
• The state owns and/or controls all factors of production (land/resources, capital and
labour)
• The state makes all the decisions
• The producer (state) is sovereign (in capitalism the consumer is sovereign)
The state plans all consumption and production
• The producer (state) is sovereign (in capitalism the consumer is sovereign)
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Adam Smith: the first and most important apologist for
capitalism (see box at the end of unit 1.2)
Adam Smith (1723 – 1790) – Regarded as the father of Economics
(Political Economy)
An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
• The market mechanism spontaneously coordinates the independent
activities of a large number of economic actors (producers,
transporters, sellers and consumers)
• Government intervention is not required (or even beneficial)
• Individuals pursuing their self-interest enhance the social interest
• “The businessman intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which
was no part of his intention. By pursuing his own interest he
frequently promotes that of the society more effectually than when
he really intends to promote it”
• Makes a strong case for division of labour and specialisation
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A strong reaction to the harsh 19th century capitalism
(not in the textbook; see the notes for more about him)
Karl Marx (1818 – 1883): The father of Marxism
Das Kapital (1867) and The Communist Manifesto (1848)
• His writings were in response to the great social inequalities and
upheaval of 19th century England
• The history of mankind is the history of class struggle
• The working class are exploited by the capitalist class
• This will lead to a proletarian revolution where the working class (the
proletariat) will overthrow the ruling capitalist and land-owning
classes
• Marx thought it was inconceivable that capitalism could reform itself
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A brief history of command economies
• Marx predicted that the proletarian revolution would happen in England
• Why did he think that?
• Why did it not happen?
• 1917: Bolshevik Revolution in backward, Tsarist Russia, led by Lenin
• 1945: Communism extended to Eastern Europe
• 1948: Mao Zedong creates communist state in China
• 1953: North Korea separated under Communist control
• 1959: Fidel Castro takes over Cuba
• 1979: major reforms in China; effectively the end of communism
• 1989: Berlin Wall comes down and communism falls in Eastern Europe and Soviet Union
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Self-Interest &
Social Interest
•Self-Interest
• You make choices that are in your self-interest—
choices that you think are best for you.
•Social Interest
• Choices that are best for society as a whole are
said to be in the social interest.
• Social interest has two dimensions:
• Efficiency
• Equity
Efficiency and
Equity
Efficiency is achieved when the available resources
are used to produce goods and services:
1. At the lowest possible price and
2. In quantities that give the greatest possible
benefit.
Equity is fairness, but economists have a variety of
views about what is fair.
The Big Question:
Can choices made in self-interest promote the
social interest?
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2
1
Mixed Economic
Systems
• A mixed economic system is made up of a combination
of market, command and traditional market systems
• All real-world economic systems are a mixture. However,
the combination of the mixture differs among countries.
• All countries lie on the market-command continuum.
Some countries like UK, USA and Norway lie closer to
the market end of the continuum.
• Countries like China and North Korea lie closer to the
command end of the continuum.