Includes graphs, definitions, clear explanations and summaries for the core economics (mandatory for first years) taught by Erasmus University College.
Core Economics Notes
Unit 1: The Capitalist Revolu on
- Economics is the study of how people interact with each other, and with the natural environment, in
producing their livelihoods
- From the 1700s, there has been a gradual increase in the average standards of living
GDP: The total value of all goods and services produced in a given period such as a year
90/10 Ra o: The average income of the richest 10% divided by the average income of the poorest 10%
GDP per capita: Total value of all goods and services produced in a country in a year divided by its
popula on (total output of a country divided by the country’s popula on)
Disposable Income: Income available a er paying taxes and receiving transfers from the government
Income measures are insu cient:
- Quality of our social and physical environment
- Work life balance
- Goods that we don’t buy (i.e healthcare and educa on in some countries)
- Domes c labour (childcare, etc)
- Absolute income clearly ma ers for wellbeing, but so does rela ve income. People report lower
wellbeing if they nd that they earn less than others in a group
- GDP per capita is a more accurate measure of living standards than disposable income because it
includes bene ts derived from goods provided by the government
- There is a gap between wellbeing and what GDP per capita measures
Nominal GDP: ∑pq (sum of the product of price and quan ty of a good produced, done for all goods)
Real GDP: GDP adjusted for changes in price (in a on) over me (also called GDP at constant prices)
Purchasing Power Parity (PPP): Used to compare living standards across countries by es ma ng GDP per
capita in a common set of prices. Shows the buying power of a currency (di erence in GDP per capita
measured at PPP is smaller than if the comparison is made at current exchange rates)
Growth Rate: Change in income/original level of income
(Ra o scale vs. Linear scale: physical distance on the scale from 1 to 2 is the same as 2 to 3 on a linear scale.
Distance from 1 to 2 is the same as 2 to 4 and 3 to 6 on a ra o scale)
(A linear line on a ra o scale = an exponen al curve on a linear scale)
Adam Smith, Wealth of Na ons: “By pursuing his (the businessman) own interest he frequently promotes
that of the society more e ectually than when he really intends to promote it
- Smith is o en associated with the idea that prosperity arises from the pursuit of self-interest under free
market condi ons
Industrial Revolu on: A wave of technological advances and organisa onal changes star ng in Britain in the
eighteenth century, which transformed an agrarian and cra -based economy into a commercial and
industrial economy
Technology: A process that takes a set of materials and other inputs and creates an output
Physical environment - Biosphere - Society - Economy (From largest to smallest)
Capitalism: An economic system in which the main form of economic organisa on is the rm, in which the
private owners of capital goods hire labour to produce goods and services for sale on markets with the
intent of making a pro t
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, (Capitalism is an economic system that advocates for produc on by rms using privately owned capital
goods and distribu on according to the market forces)
Economic System: A way of organising the produc on and distribu on of goods and services in an en re
economy
Centrally Planned Economic System: Economic systems wherein the government is the ins tu on
controlling produc on, and deciding how goods should be distributed and to whom (Soviet Union and many
other eastern European countries prior to the end of Communist Party rule in the early 1990s)
Key economic ins tu ons in capitalism in the past:
1. Private Property (people owning things)
2. Markets (where goods could be bought and sold)
3. Firms/Families (people producing things)
Capital Goods: Private property (equipment, buildings, etc) and other durable inputs used in producing
goods and services
Private Property: Anything owned by an individual, a family, a business and just any other en ty besides the
government (enjoy your possessions in a way that you choose, exclude others from their use, dispose of
them by gi or sale)
Market: A means of transferring goods and services from one person to another
Firms: A way of organising produc on with the following characteris cs:
1. An individual/group owns capital goods that are used in produc on
2. Pay wages and salaries to employees
3. Produced goods and services are the property of the owners
4. The owners sell the goods and services with the inten on of making a pro t
Markets are di erent from other means of transferring (i.e. the , gi , government provision)
1. Reciprocity: Unlike gi s and the s, the transfer of goods and services is reciprocated either through the
exchange of other goods and services (barter system) or payment of money
2. Voluntary: Both transfers (from the buyer to the seller and vice versa) are voluntary because the things
being exchanged are private property. The exchange is perceived to bene t both par es
3. Compe on: Unlike centrally planned economies, buyers have the op on to choose amongst sellers
Labour Market: The exchange of wages from employers and labour from workers takes place here
- Employers are the demand side of the labour market
- Workers are the supply side of the labour market
Two changes that accompanied the emergence of capitalism and enhanced produc vity:
1. Technology: With the emergence of several rms, each rm had strong incen ves to adopt and develop
new and more produc ve technologies to outperform their compe tors
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, 2. Specialisa on: Workers become be er and more e cient at producing things when they each focus on
a limited range of ac vi es
Specialisa on/division of labour is true:
1. Learning by doing: Acquire skills as we perform tasks
2. Di erence in ability: Certain workers may be be er than others at performing certain tasks
3. Economies of scale: Producing a large number of units of a good is more cost-e ec ve than producing a
small number
Economies of Scale: These occur when doubling all of the inputs to a produc on process more than
doubles the output
Absolute Advantage: A person or country has this in the produc on of a good if the inputs it uses to
produce this good are less than in some other person or country
Compara ve Advantage: A person or country has compara ve advantage in the produc on of a par cular
good, if the cost of producing an addi onal unit of that good rela ve to the cost of producing another good
is lower than another person or country’s cost to produce the same two goods
- Markets contribute to increasing the produc vity of labour—and can therefore help to explain the
hockey s ck of history—by allowing people to specialise in the produc on of goods for which they have a
compara ve advantage
Dynamic Economy: An economy bringing sustained growth in living standards
Two condi ons that contribute to the dynamism of the capitalist economic system: poli cal (how the
government func ons) and economic (how the markets func on)
Economic reasons why capitalism may be less dynamic:
1. Private property is not secure: Weak enforcement of law and contracts or expropria on by criminal
elements or government bodies
2. Markets are not compe ve: There is no incen ve to innovate
3. Nepo sm/Inheritance: Firms are owned and managed by individuals who are not good at delivering
high-quality goods but because of their connec ons to the government or privileged birth
Poli cal reasons why capitalism may be less dynamic:
1. Allowing the existence of monopolies
2. Inability of the government to provide essen al goods and services such as physical infrastructure,
educa on and na onal defence
Capitalism can be dynamic when:
1. Private incen ves for cost-reducing innova on
2. Firms are led by those with proven ability to produce goods at low cost
3. Public policy suppor ng these condi ons (public policy = essen al goods and services that would not be
provided by private rms)
4. A stable society, biophysical environment and resource base
- Economic systems and poli cal systems go hand in hand
- Government’s importance in the capitalist economy di ers so much among na ons
- Japan and South Korea: government is important in se ng the direc on of their economies (collec ve
capitalist economies)
Developmental State: A government that takes a leading role in promo ng the process of economic
development through its public investments, subsidies of par cular industries, educa on and other public
policies
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,
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