Unit 1 : the Capitalist revolution

What is Economics?

• The study of how people make choices and interact with each other and the environment in light of the constraints they face like scarcity

• Purpose: To understand interactions among individuals, firms, and the environment.

What makes Economics Unique?

Its focus on the allocation of scarce resources and the incentives that drive human behavior, allowing us to analyze decision-making processes at both micro and macro levels.

• Not a Pure Science: Describes and rationalizes human behavior through mathematical and empirical tools.

• Mathematical Tools:

  • Use of calculus and linear algebra to create economic models.

  • Models help understand relationships between the variables and outcomes.

• Empirical Economics:

  • Uses data and statistics to gain insights

  • Models guide decisions in policies by governments and businesses.

• Entities Involved:

  • Firms use labor and machinery to produce goods/services.

  • Households provide labor to firms.

  • Production takes from the environment and also impacts it.

• When to Use Mathematics: Data may be unavailable for hypothetical situations, such as the economic impact of a pandemic. We wouldn’t know the impact of a pandemic because it hasn’t happened in these modern times. We use math’s to theorize pr hypothesize ( hypothesize - make an educated guess or propose an explanation based on limited evidence)

What questions do economists aim to investigate?

• Branches of Economics:

  • Financial Economics: Focus on markets and financial firms.

  • Environmental Economics: Interaction between the economy and the environment.

  • Public Economics: Role of government and fiscal policy.

  • Monetary Economics: Central banks and interest rates.

  • Economics of Education: Improving educational outcomes.

  • Feminist Economics: Gender awareness in economic inquiry.

  • Development Economics: Economic disparities among countries.

  • Health Economics: Funding and access to healthcare.

  • Institutional Economics: Impact of institutions on the economy.

  • Labor Economics: Study of labor markets.

  • Economic History: Learning from historical economic developments.

  • Behavioral Economics: Intersection of psychology and decision-making.

Economic Systems

• Definition: Combination of social and economic institutions and how they interact.

• Types of Economic Systems:

  • Capitalism: Features of private property rights, markets, and firms that drive production. Inputs & Outputs privately owned and economic power generally concentrated in the hands of owners/managers.The economic power limited by competition in market

  • Communism: Aimed at common ownership of the means of production.

• Historical Distinctions:

  • Socialism: Focus on socializing production; more so on socializing consumption ( free access to goods)

  • Distinction between capitalism and democracy:

    • Capitalism can exist within various political systems (e.g.,China where the government has significant control yet allows for capitalist market practices. ).

    • Democracy: Defined by individual rights, freedom of speech, and fair elections.

  (Capitalism does not equal democracy)

Capitalism and Living Standards

• Economic Motivations: Firms strive for productivity under profit incentives.

• Contribution to Growth:

  • Specialization: We become better at producing things if we focus on a limited range of activities. Division of labor in firms and in the economy .Originated from Adam Smith’s concept of division of labor enhancing productivity.

  • Transition from subsistence to firm-oriented production increasing efficiency and production.

• Technological Advancements: Enhanced productivity through competition and innovation among firms.