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Chapter 1 Tutorial Notes-1

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35 views4 pages

Chapter 1 Tutorial Notes-1

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oloratomaneedi25
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Chapter 1: It all started with Adam Smith

• The era of Modern Economics started in 1776.


• Prior Adam Smith contribution, the landlord/people in power/Primarily rulers/The
rich were getting better off, meaning they were getting wealthier at the expense
or suffering of the poor.
• The common man standard of living remained poorer year after year, it all got
worse.
• Life expectancy was low mere 40 years, the life of a man as solitary, poor, nasty
and short.
Standard of Living:
• Refers to the material wellbeing of the average person in a given population.
• When talking about standard of living we are focusing on the following factors
from life expectancy, education and income per capita/Real per wage.
• In summary standard of living refers to quality of life, meaning the quality of life
by a common man was poor.
Real wage:
• In order to understand Real wage, you must firstly understand the nominal wage.
• Nominal wage refers to the salary a person receives e.g., if you earn R3500 per
month, the R3500 is your nominal wage or salary.
• Then when you use that R3500 to buy goods and services e.g. with that R3500
you are able to buy 150 packets of rice, that 150 packets of rice represents your
real wage
• In summary Real wage represents the amount of goods and services that can be
bought by the nominal wage.

The Dramatic fashion on 9 March 1776, A Prophetic Year.


• A London publisher printed Adam Smith’s monumental work, The wealth of
Nations.
• A 1000 pages book, the book of natural liberty, the invisible hand, global formula
for prosperity, economic independence, financial independence and a promise of
a new world of wealth and riches for both the poor and the rich.
• The common man’s hope and expectations started to rise, for the first time in
history worker looked forward to obtaining a basic minimum wage.
Basic Minimum wage:
• It refers to the lowest wage that an employer is allowed to pay an employee,
according to law or agreement.
• This minimum wage is the amount that will enable an employee to obtain basic
needs and services such as food, clothes and shelter etc.

The book proclaimed two vital freedoms namely:

• 1.Political liberty

- This consist of the right of individuals to participate in government by voting


and by holding public office.
- It refers to political democracy, it is opposed to political subjection.

• 2. Free market economy or Free Enterprise

- Refers to an economic system in which private business operates in


- Competition and largely free of state control.
- For example, individuals are allowed to start businesses, buy and sell.
- Goods and services at prices set by the market and sell their own.
- Labor with relatively few regulations or barriers to economic activity.
- Smith denounced trade restriction such as tariffs, duties and quotas.
- He believed that barriers hurt countries ability to produce.

• These two-freedom worked together to set in motion the industrial revolution.

Industrial Revolution
• Prior 1776 the economy was dominated by agrarian and handcraft economy.
• In the modern history, the process of change from an agrarian and handcraft
economy to one dominated by Industry and machine manufacturing.

Real source of wealth revealed.


• Prior 1776, the primary source of wealth was gold and sliver which only benefited
the powerful at the expense of the common man.
• Adam Smith discovered a source of wealth that would benefit both the poor and
the rich which is namely through production, exchange, specialization and
division of labor.
• Production: refers to the process of changing raw material into final goods and
services. For example the process of changing a tree into an table.
• Exchange: refer to the process of buying and selling goods and services using
money.
• Specialization: is the process concentrating on and becoming expert in a
particular subject or skill.
• Division of labour: is the assignment of different parts of a manufacturing
process or task to different people in order to improve efficiency. It is the
separation of a work process into a number of tasks, with each task performed by
a separate person or group of persons.

Smith Discovers the key to prosperity.


The key to prosperity answers the questions of how to mass produce and thereby
encourage the universal opulence, the question productivity by labor. Adam Smith had a
clear answer:
• Economic Freedom
- Individuals should be free do what one wishes without interference from state,
free mobility of labor, capital, money and goods.
- Free market and open trade that boost prosperity and reduce costs so that
societies can protect their environments, improve health and broaden access
to education.
- Nations with greater economic freedom have stronger economies, with higher
gross domestic product per person.
- Free Trade is a key element of economic freedom.
- Adam Smith believed in a self-regulating and highly competitive economy.

• Smith identifies three ingredients.


These three ingredients represent the features of this self-regulating economy.
1.Freedom: include economic freedom, the right to produce and exchange
of goods and services.
2. Competition: right to compete in the production of goods and services.
3. Justice: actions must be just, fair and honest, according to rules of the
society.
The invisible hand of Adam Smith
- Adam Smith Doctrine of self-interest is often called Invisible Hand.
- To better understand self-interest has the same meaning as selfishness or
self-benefit.
- Smith believe that the voluntary self-interest of millions of individuals would
create a stable and prosperous society without any need for Government
regulation.

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