 THE INDUSTRIAL REVOLUTION AND
CLASSICAL ECONOMICS
1. ADAM SMITH AND THE CLASSICAL
SCHOOL
2. DAVID RICARDO & THE THEORY
OF COMPARATIVE ADVANTAGE
3. THOMAS ROBERT MALTHUS & THE
PRINCIPLE OF POPULATION
4. MARGINALIST SCHOOL
5. THE MARXIST ECONOMICS
SELF-INTEREST OF MAN IS CONSTRAINED BY
THE COMMON GOOD (MORALITY)
WHICH IS MORE
IMPORTANT? LABOR,
CAPITAL, OR LAND?
CREATIVITY &
PRODUCTIVITY OF
THE MIND
PHYSIOCRATS (LAND) VS MORALISTS
(WORKERS) –ADAM SMITH
INCREASE IN WAGES = INCREASE IN
PRODUCTIVITY OF WORKERS
CURE TO PRODUCT
SHORTAGE?
INCREASE IN PRICE
ZERO PROFIT?
PRODUCERS EXIT
THE MARKET
Invisible hand = efficient
allocation of resources
through the price
mechanism
ADAM SMITH
Self-interest: constrained by morality,
markets, and government
Division of labor
↑production
↑ wage = ↑production
Product shortage
↑price
↑profit
↑production
↓product shortage
↑producers =
competition
↓price
↓profit
↓producers
INCREASE IN PRODUCTIVITY =
SPECIALIZATION OF PRODUCTS = INCREASE
IN PROFIT = TRADE (OPPORTUNITY COST IS
ELIMINATED)
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)”
Point in which the
economy is most
efficiently
producing its goods
and services
DAVID RICARDO
GEOMETRIC
GEOMETRIC
RATE:
RATE:
2,4,6,8
2,4,6,8
ARITHMETIC RATE:
1,2,3,4
LIMITED
RESOURCES
INCREASE IN
NUMBER OF
CONSUMERS
POTENTIAL RETURNS JUSTIFY THE
INVESTMENT (TIME, MONEY, ENERGY)?
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
MARKET’S EFFICIENCY =
ALLOCATION OF
RESOURCES
SOLUTION?
INTERVENTION
OF STATE
MARKET’S DEFICIENCY =
DISTRIBUTION OF INCOME
MARGINALISTS
PRICES ARE
DETERMINED BY
THE COST OF
PRODUCTION
PRICES ARE
DETERMINED BY
THE LEVEL OF
CONSUMER
SATISFACTION
TO EXPLAIN THE
DISCREPANCY IN THE
VALUE OF GOODS AND
SERVICES BY
REFERENCE TO THEIR
UTILITY
PRICE INCREASES = HOW THE
COMMODITY WAS PRODUCED AND
WILL BE USED (SATISFACTION)
MARGINAL COSTS: additional cost to you
from the costs you have already incurred.
MISCELLANEAOUS
SUNK COSTS: costs that have already
been incurred and cannot be recovered.
TUITION
→ School → Work →
→
Man → World
→
Death
?
→
MARX
Loss of Meaning
→
Framework: loss & gain
State
→
→
Capitalist
→
Businessmen
→
→
Workers
Class Structure
Thesis: Bourgeois (Capitalist)
Antithesis: revolution
→
No Private Ownership
SOCIALISM: no private
individual would own the
“means of production” but the
community as a whole
Alienation/ separation
Parts: Replaceable
→
Synthesis: Communist Society
Exploitation/
Suffering
→
Recovery?
↑Meaning in
life: free time
Worker to the
product/ activities
Religion: Opium
Wealth and power will be
equally shared by all
ALFRED MARSHALL
INSTITUTIONALISTS
KEYNESIAN ECONOMICS
(JOHN MAYNARD KEYNES)
DETERMINANTS OF
PRICE & QUANTITY
TO SYSTEMATIZE
SUPPLY & DEMAND
MARKET
EQUILIBRIUM
ALLOCATION OF
OUTPUT & INCOME
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
PRICE:
DETERMINED BY
SUPPLY AND
DEMAND
PRICE ELASTICITY
OF DEMAND:
BUYERS’
SENSITIVITY TO
PRICE
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 do pays
consumer satisfaction in terms of
utility.
BUDGET: P 1500
CONSUMER
SURPLUS?
P 800
P 400
P28,000
P38,000
P12,000
 Consumer surplus. 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
P50,000.00; that is you have set yourself a budget
of p50,00.00. So the next day you go down to the
computer store and find a computer with all the
features you wanted for p40,000.00. This meant
you spent P10,000 less than your budget.
 What is the consumer surplus here?
 That 10,o00 is your consumer surplus. Consumer
surplus is the difference between what you are
willing to pay and what you actually pay.
the difference between the
amount that a producer
receives from the sale of a
good and the lowest amount
that producer is willing to
accept for that good.
As the price rises, there is a great
incentive to supply
PM: MINIMUM PRICE THE
PRODUCER IS WILLING TO
SUPPLY
MARKET PERIOD
2. SHORT PERIOD
3. LONG PERIOD
1.
 How long the product is at the starting
price in the market
 E.g.
 32 INCHES LCD TV WAS INTRODUCED
AT AN INITIAL MARKET PRICE OF p42,
000
 AS LONG AS THE PRICE IS P 42,000,
THEN THIS IS THE MARKET PRICE
 As long as the demand is high the price
stays constant
 The time when the number of a certain product is
being increased through labor or other methods
 But there is no more capital being invested
 E.g.
 Last series of increase in production of LCD TVS
 Foresight: the demand might become low
 Investment on LCDs decreases
 The time it takes for there to be a need
for the increase in capital to uphold/
continue to production of a good
 EG.
 People’s preferences/ demand evolve
INSTITUTIONALISTS VS.
LAISSEZ-FAIRE
GOVERNMENT SHOULD
CONTROL THE SOCIETY FOR
THEY CAN BRING ABOUT THE
NEEDED SOCIAL CHANGE
EMPLOYMENT = GOVERNMENT
SPENDING = TAX
DECREASE INCOME = DECREASE
IN SPENDING = FEW TAX
INCREASE IN UNEMPLOYMENT =
DEPRESSION
MACROECONOMICS = INFLATION &
UNEMPLOYMENT
SAVING VS INVESTMENT = INCREASE IN
INCOME AND EMPLOYMENT