Econ 105: Exam 1
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Economics, Mainstream Tradition
Economics is the study of the allocation of scarce resources to satisfy unlimited wants
Economics, Heterodox Tradition
Economics is the strudy of how societies provide for material needs and wants
Three tests of a model
1) Are the assumptions realistic?
2) Is the model consistent?
3) Can the hypotheses generated by the model predict future events or explain past events?
- 1) Reciprocity
- 2) Redistribution
- 3) Householding
- 4) Market
Institution of Reciprocity
- - "Gift Giving"
- - Simple Give and Take
- - Ex: Offering rides to friends
Institution of Redistribution
- - Goods are distributed to a central authority which then redistributes the goods according to some purpose or principle
- - EX: Government or Non-Profit Organizations.
Institution of Householding
- - Producing goods for one's own use.
- - Self-Sufficiency
- - EX: Indigenous populations hunting for food.
- -A place where buyers and sellers come together to exchange goods and services.
- -Each person looks to his own interest.
- -Individuals vote with their dollars to decide what goods to produce, how to produce them, and for whom to produce them for.
- -The market system represent the preferences of those who have votes.
The study of how individuals, firms, and society as a whole allocate their scarce resources to achieve their objectives.
- -Concerned with the economy as a whole
- - The study of the determinants of national income, the price level, and unemployment
- -From the whole to the part.
- -Models are based off of deduction because it goes from the vision, to the set of the assumptions to generate a deduction or conclusion.
From the part to the whole.
Post Hoc Ergo Propter Hoc
- - After this therefore because of this.
- - Relating two unrelated events.
- -Ex: I stepped on a crack, and my cat broke his back.
Fallacy of composition
The notion that what is true for the part is true for the whole.
Fallacy of misplaced concreteness
Refers to treating the "picture" as though it is real.
The value of the next alternative forgone.
Production Possibilities Frontier
The different combinations of goods that society is capable of producing given that its resources are fully employed.
Law of Increasing Relative Cost
- -In order to obtain equal increments of one good, society must give up increasing amounts of the other good.
- -The reason is specialization and division of labor.
Efficiency in production
You cannot increase the production of one good without decreasing the production of another good.
Efficiency in distribution
Society cannot increase the happiness of one person without reducing the happiness of another.
Fairness, treating two or more individuals relatively the same.
- -Subjecting human relations to market forces.
- -Requires transforming nature and people into commodities into something for purchase and sale.
Extending the market system to traditional people always leads to conflict because... ?
People seldom forego the certainty of their previous life to engage in the uncertainty of another.
- -Traditional economic system in which the rules for conduct are reflected in the traditions and customs of people.
- -Rules are based off of serving God, prepping for war, and general survival.
- -Making money was sinful
How was feudal society divided?
- Into two classes:
- -The feudal lords, priests, and knights
- -The serfs
Feudal society can be compared to what?
- A stick figure.
- -Head: Feudal Lords
- -Arms: Knights
- -Feet supporting the structure: Serfs
Factors involved in the decline of feudalism
- 1) The Crusades:
- The ensuing wealth that poured into the cities helped finance the Renaissance.
- 2) The Renaissance:
- Helped decline religious affluence
- 3) The Discovery of the New World:
- -Europenas pillaged the temples of the Aztec civilization, sending precious metals back to spain.
- -Contact with the Spanish decimated the Indians
- 4) Protestant Reformation
- -Doctrines took hold because they allowed accumulation of wealth (it was no longer a sin)
- 5) The Enclosure Movement:
- -Landowners kicked the serfs out because they were no longer an estimate of wealth. The enclosed their land to raise sheep because it was the new estimate of wealth.
- -Represent Britain's efforts to deal with poverty.
- -If poverty can't be abolished, at least make it profitable.
- - It is not by doing good deeds that one achieves salvation.
- -Created Religious Individualism: Each person is responsible for his or her own salvation.
- -The Doctrine of Predestination
- -The Doctrine of the Calling
- -The Doctrine of Wordly Asceticism
The idea that each individual has a duty to increase his/her wealth
The Doctrine of Predestination
- -The idea that God has already predetermined one's fate: Salvation of Damnation.
- -An indication of wether one has received God's grace is material prosperity.
- -Wealth and Poverty became a measure of character.
The Doctrine of the Calling
- -The idea that one has been called by God to do one's own work.
- -You now have a moral obligation to do your job well.
- -Making money is no longer a sin, but it is a duty to God.
- -THE ORIGIN OF PROTESTAN WORK ETHIC
The Doctrine of Worldly Asceticism
- -The idea is that to consume is to enjoy life inspired by the devil.
- -One needs to deny pleasures in life and SAVE.
The first stage of capitalism
What was wealth in mercantalist?
Gold and Silver.
Zero Sum Gain
One country's gain is another country's loss.
Laissez Fair or Market Capitalism
Business interests need to be set free.
- - Evil exists in the world to create activity.
- -The poor are responsible for their poverty, nor society. Poverty results from immorality. (Solution: Do nothing)
Smith's Invisible Hand Doctrine
Each individual pursuing his own self interest unintentionally helps others achieve their interests.
Smith's Value Theory
The real price of everything is the toil and trouble of acquiring it.
Smith's Law of Accumulation
Capitalists save -> use their money to buy machines -> machines increase the division of labor -> d of lab increases productivity -> increases wealth, and benefits everytone.
- Accumulation ensures suffieicent workes through the law of population.
Smith's Law of Population
Fewer workers causes accumulation bids to up the wage rate -> High wages enable workers to better feed and clothe their families -> Reduces mortalities -> Increases the supply of labor -> Allows accumulation of continue.
Malthus Theory of Population
-Nature increases at arithmetic rate, population at a geometric rate. Population growth will be checked by the lack of food.
Ricardo's Theory of Economic Growth
- -Growth depends on the distribution of income.
- -Profit Rate: The ratio of profits to wages.
- -Rents: The difference between the most and least fertile land in cultivation.
- -Corn laws made unprofitable land profitable -> Increase competition among capitalists for fertile land -> Increased rents -> Reduced profits.
- -As population rises -> Farmers cultivate inferior land -> rents rise -> profit falls -> falls to zero -> The end of capitalism.
- -A tax that Parliament had leviend to discourage imports and keep rents high.
- -Made unprofitable land profitable.
How do wages tend to subsistence? (Malthus)
- -Workers are inferior to capitalists and landowners, this means that they can't control their passions.
- -Wages above subsistence lead to more children; wages below subsistence leads to death.
- Human beings are psychological egoists motivated by pleasure and pain.
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