750 likes | 965 Views
Economics is the Social Science which seeks to solve the basic problem of meeting the unlimited wants of society using the world’s limited resources. Economics is the original Social Science. Ο ἰκονομία oikos (home, household) nomia (rules, governance )
E N D
Economics is the Social Science which seeks to solve the basic problem of meeting the unlimited wants of society using the world’s limited resources. Economics is the original Social Science.
Οἰκονομία oikos(home, household) nomia (rules, governance) The first course of study in Economics was developed in classical Greece. The Romans would later latinizeOikoto Eco, nomia to nomis. They adapted the content to be applicable throughout their empire.
The Roman Empire was the world’s largest empire until the 20th century. Economics was taught throughout the empire, so when the empire began to recede, those people left behind had been taught the skills needed to manage their households and livelihoods. The empire would finally collapse in 475AD, leaving behind self-sufficient communities.
By the middle ages, the term “economics” is in use in English as a description for “the art of managing a household”. Because of the isolation imposed after the collapse of the Roman Empire, the science of economics gained increased importance. Walled cities were the norm, and had to use economics to survive.
By the beginning of the Renaissance, the term “Political Economy” has come into existence, referring to the management of a community, city, state, or country.
During the Renaissance, economics further developed as a philosophy. Instead of just solving problems, questions about right and wrong developed. This resulted in two different types of Economics: Positive Economics- Decisions are based upon efficiency. Normative Economics- Decisions are based upon value judgments. Concepts in Normative Economics became an important component of the Enlightenment.
During the 16th Century, England developed the first cohesive national economic policy when they implemented the Mercantilistic system. Mercantilism Mercantilism is basically a system where the home country exports as much as possible while importing as little as possible to maintain a positive balance of trade, and thus to build a stockpile of gold. That gold could then be used to enhance the government’s power. Production, pricing and sale of exports and imports is controlled by the government.
The Modern Era of Economics • Throughout the Renaissance and the Enlightenment, Economics gained scope and influence. • The Enlightenment (or the Age of Reason) was a cultural movement of intellectuals, that sought to use reason to explain all issues, in order to reform society and advance knowledge
Although Mercantilism was successful in allowing England to gain political and economic dominance in Europe, it attracted the attention of competing powers, and they too began to adopt Mercantilistic policies. • As more countries adopted Mercantilism, fewer countries were willing to buy English goods. England increasingly imposed harsher requirements upon their colonies to support the system. This led to opposition to both England, and to mercantilism.
Adam Smith (b. 1723) • Attends college at Glasgow and Oxford, meets David Hume. • Publishes Theory of Moral Sentiments (1759) • Spends four years in Europe as a tutor, beginning in 1762. While abroad, meets the prominent enlightenment philosophers based in Paris, including Benjamin Franklin, Denis Diderot and Francois Quesnay. • Publishes A Treatise By Way of Inquiry into the Nature and Causes of the Wealth of Nations (1776 )
The Wealth of Nations The publication of The Wealth of Nations in 1776 marked the beginning of the Modern Era of Economics. It was not so technical that it could not be understood by laymen, so it was much more widely distributed than other texts of the period. Over 250000 copies were printed during Adam Smith’s life.
The Wealth of Nations is at it’s core a critique of Mercantilism, and a statement of Adam Smith’s ideas about economic freedom, political strength, and increasing the prosperity of individuals. It’s ideals were gradually instituted in England, but took hold quickly in the new governments of the United States and post-revolution France.
The main points in The Wealth of Nations include: • The benefits derived from individual freedom in a laissez-faire economy • National advantages in competitive foreign trade • Increasing productivity by allowing individuals to benefit from modernization and ingenuity. • Using the scientific method to approach economic problems.
As the principles in The Wealth of Nations became more widely accepted, many different systems were developed to try to achieve specific goals. All of these systems seek to answer the same problem: Relative Scarcity- All goods are scarce relative to the quantity that would be used if supply were unlimited. Because of this basic principle, the way a system uses resources is what will define that system.
Production • In order to maximize satisfaction that can be achieved from those scarce resources, the concept of production evolved. There is a simple definition for production… • Production – the creation of value. This involves acting upon a resource to convert it into a more valuable form. The physical attributes of the resource of the same, it’s just re-arranged to be more useful, thus more valuable. All production involves four components, called the four factors of production.
Production • While production is simply the “creation of value”, different things have different types of value. We generally identify two types of things… • Goods – Tangible Items of Value • Services – Intangible Items of Value
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources)-
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources)- Anything that is naturally occurring that is used in the production process.
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources)-
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources)- Human effort exerted towards production
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources) • Capital –
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources) • Capital – Anything that facilitates the manipulation of a natural resource. (also, the produced means of production)
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources) • Capital • Entrepreneurship (Management)
The Four Factors of Production • Regardless what is being produced, all four factors must be present before production takes place. • Land (Natural Resources) • Labor (Human Resources) • Capital • Entrepreneurship(Management) – The coordination of the other three factors so that production can take place.
The Four Factors of Production • Each factor of production earns a unique reward. • This allows us to assign value proportionately to each of the factors. • We refer to a concentration of value due to one factor as “intensity”.
The Four Factors of Production • Each factor of production earns a unique reward. This allows us to assign value proportionately to each of the factors. • Land – Economic Rent • Labor - • Capital - • Entrepreneurship -
The Four Factors of Production • Each factor of production earns a unique reward. This allows us to assign value proportionately to each of the factors. • Land – Economic Rent • Labor - Wages • Capital - • Entrepreneurship -
The Four Factors of Production • Each factor of production earns a unique reward. This allows us to assign value proportionately to each of the factors. • Land – Economic Rent • Labor - Wages • Capital - Interest • Entrepreneurship -
The Four Factors of Production • Each factor of production earns a unique reward. This allows us to assign value proportionately to each of the factors. • Land – Economic Rent • Labor - Wages • Capital - Interest • Entrepreneurship - Profits
Productivity • Productivity is a measure of the efficiency of production. Some political and economic systems provide for greater productivity than others, but basically productivity is determined (and limited by) three factors… • The quality of available natural resources • The quality of available human resources • The quality of available capital
Using our Resources to Serve Our Economic Self Interest • Since the market does not make all of our choices for us in a mixed economy, we need another way to prioritize our wants. • In our system, we typically use a measure known as Opportunity Cost. • Opportunity Cost is defined as the value of the next best alternative. It is what one gives up in order to have the opportunity to spend the nominal cost required to purchase an item.
Making Choices in Mixed Economies • Nominal Cost = the actual price or cost of an item. • Opportunity Cost = the value of the next best alternative. Calculate the real cost of going to college… • Nominal Cost = Tuition, fees, living expenses • Opportunity Cost= The value of anything you could have done instead. If work is the next best alternative, how much would you have been paid?
Economic Systems • Once we have successfully produced items in order to maximize the value of our scarce resources, we must still have a method or system for deciding how to allocate or divide those resources. • That method or system will be identified as an economic system, even though it is often intermingled with a political system. As with Mercantilism, a government can often use economic policies to incorporate their agenda, so the two types of systems usually operate side by side.
Three Basic Economic Systems Even though there are thousands of variations of economic-political systems, all of them are one of three basic systems, or a mixture of two or more of the three. Economic systems are identified by the way that they answer each of the four basic questions.
Basic Questions of Economics • Regardless of which system we may live under, there are four basic questions that the system must answer: • What will be produced?
Basic Questions of Economics • Regardless of which system we may live under, there are four basic questions that the system must answer: • What will be produced? • How will it be produced?
Basic Questions of Economics • Regardless of which system we may live under, there are four basic questions that the system must answer: • What will be produced? • How will it be produced? • Who will produce it?
Basic Questions of Economics • Regardless of which system we may live under, there are four basic questions that the system must answer: • What will be produced? • How will it be produced? • Who will produce it? • Who will receive it?
Three Basic Economic Systems • Every economic system in history has been one of the three basic types, or a mixed system. • The three types- Traditional, Market, and Command- develop in an evolutionary progression. • We will discuss “Pure Systems”, but in reality, “pure or perfect” does not exist. These are so rigidly defined that they exist only in theory.
Traditional Economic System • The traditional system is the one that naturally develops when people begin living cooperatively. • Four characteristics of the Pure Traditional System • Occurs in poor rural areas
Traditional Economic System • The traditional system is the one that naturally develops when people begin living cooperatively. • Four characteristics of the Traditional System • Typically occurs in poor rural areas • Subsistence level production
Traditional Economic System • The traditional system is the one that naturally develops when people begin living cooperatively. • Four characteristics of the Pure Traditional System • Typically occurs in poor rural areas • Characterized by subsistence level production • Lack of efficient capital equipment
Traditional Economic System • The traditional system is the one that naturally develops when people begin living cooperatively. • Four characteristics of the Pure Traditional System • Occurs in poor rural areas • Subsistence level production • Lack of efficient capital equipment • Isolation
Traditional Economic System • The Traditional System answers the four basic questions using tradition as a guide. All of the questions are answered by looking at what the society has traditionally done. • What will be produced is decided by tradition… • How it will be produced, again decided by tradition. • Who produces it, and who receives it will also be decided by how it has traditionally been done.
Traditional Economic System • Eventually an economy tends to evolve beyond the traditional system. Population growth causes the isolation to break down, allowing contact with groups who have access to different resources, or that are producing different items of value. • This introduction to new things gives incentive to accept risk, and to try new products, methods of production, or social mobility. • This leads to the adoption of…
Market Economic System • The principal feature of the market system is that because of the possibility of trade, the answers to the four basic questions are now to be decided by the market. • A market is defined as any interaction between a buyer and a seller.
Market Economic System • The Pure Market system has four characteristics… • Many Buyers and Sellers
Market Economic System • The Pure Market system has four characteristics… • Many Buyers and Sellers • No Barriers to Entry or Exit
Market Economic System • The Pure Market system has four characteristics… • Many Buyers and Sellers • No Barriers to Entry or Exit • No Government Intervention