Class Two Economics Pre Work

How capitalism revolutionised the way we live, and how economics attempt
to understand this and other economic systems?
1700s > Emerge of capitalism > The average living standards increased > Advances in
technology and specialization > raised the amount that could be produced in a day’s work >
threats to our natural environment, and by unprecedented global economic inequalities.
 CAPITALISM is an economic system in which private individuals or businesses own

capital goods.
 ECONOMICS is the study of how people interact with each other, and with the
natural environment, in producing their livelihoods.
 GROSS DOMESTIC PRODUCT (GDP) a measure of the total goods and services
produced in a country.
 GDP PER CAPITA is GDP divided by its total population.
1.1 Income inequality
1. In every country, the rich have much more than the poor. To measure inequality of
income in a country we use rich/poor ratio.
 In Singapore, the average incomes of the richest and poorest 10% are $67,436 and
$3,652 respectively.
 In Liberia, the corresponding incomes are $994 and $17.
2. Huge difference in income between countries
 Average income in Norway is 19 times the average income in Nigeria.
 The poorest 10% in Norway receive almost twice the income of the richest 10% in
Nigeria.
The countries that took off economically before 1900—UK, Japan, Italy—are now rich.
The countries that took off only recently, or not at all, are in the flatlands.
1.2 Measuring income and living standards

Is GDP the right way to measure living standards, or wellbeing? Or is disposable income
better?
DISPOSABLE INCOME
 Is the amount of wages or salaries, profit, rent, interest, and transfer payments from
the government or from others received over a given period such as a year, minus
any transfers the individual made to others.
 What we can buy
Income is a major influence on wellbeing because it allows us to buy the goods and services
that we need or enjoy.
But it is insufficient because it leaves out:
 Goods and services that are produced within the household

 Goods and services that we do not buy, such as healthcare and education, if they are
provided by a government.
 Income distribution
GDP includes the goods and services produced by the government. They contribute to
wellbeing but are not included in disposable income.
In this respect, GDP per capita is a better measure of living standards than disposable
income.
1.3 History’s hockey stick: Growth in income
Growth rate= Change in income / Original level of income

In some economies, substantial improvements in people’s living standards did not occur
until they gained independence from colonial rule or interference by European nations.
1.4 The technological revolution
1. Remarkable scientific and technological advances occurred at the same time as the
upward kink in the hockey stick in Britain in the middle of the eighteenth century.
2. Important new technologies were introduced in textiles, energy, and transportation.

Its cumulative character led to it being called the industrial revolution.
3. This marked the beginning of a permanent technological revolution because the
amount of time required for producing most products fell generation after
generation.
4. By reducing the amount of worktime, it takes to produce the things we need,
technological changes allowed significant increases in living standards.
5. The speed at which information travels provides more evidence of the novelty of the
permanent technological revolution.
1.5 The economy and the environment
Humans have always relied on their environment for the resources they need to live and
produce their livelihoods.
THE BIOSPHERE is defined as the region on, above, and below the Earth's surface where life
exists.
Elements of the ecological system such as air, water, soil, and weather have been altered by
humans more radically than ever before > The most striking effect is climate change.
The likely consequences of global warming are far-reaching:
 Melting of the polar ice caps.

 Rising sea levels that may put large coastal areas under water.
 Potential changes in climate and rain patterns that may destroy the world’s food-
growing areas.
But the permanent technological revolution > which brought about dependence on fossil
fuels > may also be part of the solution to today’s environmental problems.
1.6 Capitalism defined: Private property, markets and firms
CAPITAL GOODS are the assets used by businesses in the course of producing their products
and services, and can include buildings, machinery, tools and equipment.
A MARKET is where buyers and sellers can meet to facilitate the exchange or transaction of
goods and services.
 Voluntary
 Reciprocated
 With competition
A FIRM is a business organization that seeks to make a profit through the sale of goods and
services.
The expanded role of firms created a boom in another kind of market that had played a
limited role in earlier economic systems: the labour market.
Government bodies or family companies tend to be more limited in their capacity to expand
if successful and are usually protected from failure if they perform poorly.
1.7 Capitalism as a social system
Capitalism is an economic system that combines centralization with decentralization. It

concentrates power in the hands of owners and managers of firms who are then able to
secure the cooperation of large numbers of employees in the production process. But it
limits the powers of owners and of other individuals, because they face competition to buy
and sell in markets.
Two major changes accompanied the emergence of capitalism
 Technology
 Specialization
1.8 Specialisation
Gains specialisation:
1. Learning by doing
2. Difference in ability
3. Economies of scale
Problem specialisation: how are the goods and services to be distributed from the producer
to the final user?
Economists distinguish who is better at producing what in two ways:
1. Absolute advantage
2. Comparative advantage.
1.9 Capitalism, causation, and history’s hockey stick

An economy is made up of the interactions of millions of people. We cannot measure and
understand them all, and it is rarely possible to gather evidence by conducting experiments.
1.10 Varieties of capitalism
Where capitalism is less dynamic, the explanation might be that:
 Private property is not secure: There is weak enforcement of the rule of law and of
contracts, or expropriation either by criminal elements or by government bodies.
 Markets are not competitive: They fail to offer the carrots and wield the sticks that
make a capitalist economy dynamic.
 Firms are owned and managed by people who survive because of their connections
to government or their privileged birth: They did not become owners or managers
because they were good at delivering high-quality goods and services at a
competitive price. The other two failures would make this more likely to occur.
Capitalism can be a dynamic economic system when it combines:
 Private incentives for cost-reducing innovation: These are derived from market
competition and secure private property.
 Firms led by those with proven ability to produce goods at low cost.
 Public policy supporting these conditions: Public policy also supplies essential goods
and services that would not be provided by private firms.
 A stable society, biophysical environment, and resource base
One of the reasons why capitalism comes in so many forms is that over the course of history
and today, capitalist economies have coexisted with many political systems. A political
system, such as democracy or dictatorship, determines how governments will be selected,
and how those governments will make and implement decisions that affect the population.
1.11 Economics and the economy
ECONOMICS
1. How we come to acquire the things that make up our livelihood: Things like food,
clothing, shelter, or free time.
2. How we interact with each other: Either as buyers and sellers, employees or
employers, citizens and public officials, parents, children and other family members.
3. How we interact with our natural environment: From breathing, to extracting raw
materials from the earth.
4. How each of these changes over time.

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How capitalism revolutionised the way we live, and how economics attempt

to understand this and other economic systems?

 CAPITALISM is an economic system in which private individuals or businesses own

 GDP PER CAPITA is GDP divided by its total population.

1.1 Income inequality

 In Liberia, the corresponding incomes are $994 and $17.

2. Huge difference in income between countries

 Average income in Norway is 19 times the average income in Nigeria.

1.2 Measuring income and living standards

But it is insufficient because it leaves out:

 Goods and services that are produced within the household

1.3 History’s hockey stick: Growth in income

Growth rate= Change in income / Original level of income

1.4 The technological revolution

2. Important new technologies were introduced in textiles, energy, and transportation.

1.5 The economy and the environment

The likely consequences of global warming are far-reaching:

 Melting of the polar ice caps.

1.6 Capitalism defined: Private property, markets and firms

1.7 Capitalism as a social system

Capitalism is an economic system that combines centralization with decentralization. It

Two major changes accompanied the emergence of capitalism

Economists distinguish who is better at producing what in two ways:

1.9 Capitalism, causation, and history’s hockey stick

1.10 Varieties of capitalism

Where capitalism is less dynamic, the explanation might be that:

Capitalism can be a dynamic economic system when it combines:

 A stable society, biophysical environment, and resource base

1.11 Economics and the economy

4. How each of these changes over time.

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