Economic behaviour
Economy -> The state of a country or region in terms of the production and consumption of goods
and services and the supply of money
Economics -> The study of how people interact with each other, and with the natural environment, in
producing their livelihoods. Using resources/making comparisons/predicting. Also based on data. It is
a social science.
GDP (gross domestic product) -> The total value of everything produced in a given period such as a
year. Is also referred to as gross domestic income.
- Not a good way of measuring because it does not take domestic chores or black
(non-official) money transfers into account
- Does include goods & services produced by the government
Normative statements -> based on judgements/subjective
Positive statements -> based on facts/objective
Disposable income -> The amount of wages or salaries, profit, rent, interest and transfer payments
from the government or from others received over a given period minus any transfers the individual
made to others (including taxes paid to the government)
- Is thought to be a good measurement of living standards because it is the maximum
amount of food, etc. that the person can buy without borrowing (that is without
going into debt or selling possessions)
Also disposable income is not a great measure of our wellbeing, because it leaves, for example, out:
- The quality of our social and physical environment such as friendships and clean air
- The amount of free time we have to relax or spend time with friends and family
- Goods and services we do not buy, such as healthcare and education, if provided by a
government (Does not include government’s goods and services)
- Goods and services that are produced within the household, such as meals or childcare
- The average doesn’t take inequality into account
Measurement of inequality in a country: 90/10 ratio. The average income of the richest 10% divided
by the average income of the poorest 10%.
The hockey stick:
- For a very long time, living standards did not grow in any sustained way
- When sustained growth occurred, it began at different times in different countries, leading to
vast differences in living standards around the world
- The countries that took off economically before 1900 are now rich, the countries that took
off only recently, or not at all, are in the flatlands. For some countries for example it started
when they gained independence from colonial rule or interference by European nations.
A ratio scale (doubling) is used for comparing growth rates.
Growth rate = (change in income)/(original level of income)
Economic System -> A way of organizing the production and distribution of goods & services in an
entire economy
,Institutions -> The different sets of laws and social customs regulating production and distribution in
different ways in families, private businesses and government bodies
Markets -> Means of transferring goods or services from one person to another
- Voluntary
- One person’s transfer is directly reciprocated by a transfer in the other direction
- The exchange must be beneficial in the opinion of both parties
Since the 1700s, increases in average living standards became a permanent feature of economic life
in many countries. This was associated with the emergence of a new economic system: Capitalism
(not a specific economic system, rather a class of system sharing these characteristics)
Capitalism:
- Private property, markets & firm play a major role
o Private property exclude other from their use if you wish, you can use as you want
and you can dispose of them by gift or sale and make someone else their owner
Is also essential, buyers will not want to pay for goods if they can’t own them
o Important type of private property: Capital goods -> The equipment, buildings, raw
materials, and other inputs in producing goods and services, including where
applicable any patents or other intellectual property that is used
o For something to be a firm:
One or more individuals own a set of capital goods that are used in
production
They pay wages and salaries to employees
They direct the employees (through manager) in the production
The goods and services are the property of the owners
The owners sell the goods and services on markets with the intention of
making profit
So not, family businesses, non-profit organizations, employee-owned
cooperative and government-owned entities
A striking characteristic of firms is how quickly they can be born, expand,
contract and die.
o Market competition provides a mechanism for weeding out those who underperform
(membership of the elite often depends on a high level of economic performance)
- The distinctive hallmark of the capitalist economic system is the private ownership of capital
goods that are organized for use in firms.
- Trust (companies won’t survive long when not fair)
- Capitalism is an economic system that combines centralization with decentralization. It
concentrates power in the hands of owners and managers of firms, but it limits the powers ->
Success
- of owners and of other individuals, because they face competition to buy and sell in markets.
- Advances in technology and specialization in products and tasks raised the productiveness ->
The capitalist revolution
- This has been accompanied by growing threats to our natural environment and by
unprecedented global economic inequalities.
- The expanded role of firms created a boom in another kind of market: the labour market. In
this market, employers offer wages to individuals who may agree to work under their
direction. (employers on the demand side, workers supply side)
, - Markets and private property are essential parts of how firms function for two reasons:
o Inputs and outputs are private property.
o Firms use markets to sell outputs. The owners’ profits depend on markets in which
customers may willingly purchase the products at a price that will more than cover
production costs.
- Two major changed accompanying capitalism, causing growth in living standards through
enhanced productivity:
o Technology, caused mainly by firms, because firms competing with each other in
markets had strong incentives to adopt and develop new and more productive
technologies and to invest in capital goods
o Specialization, the growth of firms employing large numbers of workers allowed it
Centrally planned economic system -> The government is the institution controlling production and
deciding how goods should be distributed and to whom (was in Soviet Union or East Germany)
Industrial Revolution (1760 - 1840) -> A wave of technological advances and organizational changes
starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy
into a commercial and industrial economy
- Technology: A process that takes a set of materials and other inputs -including the work of
people and machines- and creates an output.
- Before the Industrial Revolution, the economy’s technology was updated only slowly and
passed from generation to generation.
- Triggered by the use of coal, production of steam -> scientific breakthrough, also leading to
more specialisation.
- Technological progress: A change in technology that reduces the amount of resources
required to produce a given amount of the output. Marked the beginning of a permanent
technological revolution.
- These technological innovations give a growth in living standards because they change the
way that large parts of the economy work. (Like decreasing the time it takes to produce
things)
Developmental state -> A government that takes a leading role in promoting the process of
economic development through its public investments, subsidies of particular industries, education
and other public policies.
Specialization:
- Capitalism enhanced our opportunities for specialization by expanding the economic
importance of both markets and firms (distribution from producer to user)
o Markets cause comparative advantage to be used
3 Reasons we become better at producing when we use specialization:
1. Learning by doing
2. Difference in ability (some people are better at producing some things than others)
3. Economies of scale: Producing a large number of units is often more cost-effective
Absolute advantage -> Has more production with the same input
Comparative advantage -> If the cost of producing an additional unit of that good relative to the cost
of producing another good is lower than another person or country’s cost to produce the same two
goods
