2. 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

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

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

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

6. INCREASE IN WAGES = INCREASE IN PRODUCTIVITY OF WORKERS

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

8. Invisible hand = efficient allocation of resources through the price mechanism

9. ADAM SMITH

11. 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

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

15. 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)”

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

21. DAVID RICARDO

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

24. INCREASE IN NUMBER OF CONSUMERS
LIMITED RESOURCES
INCREASE IN NUMBER OF CONSUMERS

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

28. 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

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

35. 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.

36. 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)

38. → 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

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

40. 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

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

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

45. 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.

46. 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

47. 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).

48. 3 PERIODS OF HOW MARKETS ADJUST TO SUPPLY & DEMAND (Alfred Marshall)
MARKET PERIOD
SHORT PERIOD
LONG PERIOD

49. 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)

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

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

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

58. Aggregate demand is influenced by monetary and fiscal policies

59. 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)