ECO1010F
UNIT 1: THE CAPITALIST REVOLUTION
Lesson 1: Introduction to Economics
Part A: Basic Concepts
What is economics?
The social science that analyzes the most e cient way to use our scare resources.
Alternative Player Traditional Alternative De nition
De nition Focused De nition
Economics is the The study of how Economics is a The theories, principles, and
social science that individuals, social science (like models that deal with how the
studies the governments history, physiology, market process works. It
production, businesses and etc.) that looks at attempts to explain how wealth
distribution, and other how societies make is created and distributed in
consumption of goods organizations ef cient use of communities, how people
and services, make choices scare resources to allocate resources that are
Economics focuses that effect the maximize the scarce and have many
on the behavior and allocation and satisfaction of alternative uses, and other
interactions of distribution of people’s unlimited such matters that arise in
economic agents and scarce resources. material wants. dealing with human wants and
how economies work. their satisfaction.
It’s about producing & consuming, it's about power dynamics between people, it’s about wealth
and poverty.
Most people are not super-rich and as a result
they cannot buy everything that they want.
They have to make choices. That is the essence of
economics: making choices.
What do Economist’s study?
• Production of goods and services
• Consumption of goods and services
What makes a problem an economic one?
• Problem of scarcity and choice
• Needs (food, shelter, etc.) VS Wants (Ferrari,
overseas holiday)
Wants are desired once needs are met
Human capital: The term human capital refers to the economic value of a worker's experience
and skills. Human capital includes assets like education, training, intelligence, skills, health, and
other things employers value such as loyalty and punctuality
Scarcity: we have limited resources but unlimited wants
3 Basic Economic Questions:
1. Output Question
- What should we produce? = what is high in demand = high price vs what lacks demand = low
price
- The demand for goods and services is determined by people, more speci cally people with
money. Without money I can’t buy and I don’t have any in uence on what will be produced.
With my money I “vote” for the things that I want to purchase.
2. Input Question
- How do we produce it? eg. A road is being built
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, Labour intensive: Many workers use shovels and
spades VS
Capital intensive: Less workers using sophisticated
tractor that lays the tar
- If labour is relatively cheap, as in many African
countries, it makes sense to adopt a more labour-
intensive production approach.
- If labour is relatively expensive, while capital is
relatively cheaper and more abundant, like in Europe,
North America and Japan, it makes sense to adopt a
more capital-intensive production approach.
3. Distribution Question
- Who are going to bene t from the production? =the
people who buy the products are the ones who
determine what will be produced through their “money
votes”
- There are ways that the government can in uence the
distribution question. The most common method the
government uses is through taxation and government spending
Whether we like it or not, the people with more money will be able to buy more goods and
services than the people with less money. Some people might think that this is unfair, but this is
the essence of the market/capitalist system.
MONEY=POWER….ABUNDANCE=LACK OF WANT=LACK OF SCARCITY= CHEAP
Factors of Production:
1. Land
1. Natural Resources
2. Owners of land earn Rent
2. Labour
1. Time and E ort
2. Owners of labour earn Wages
3. Capital
1. Instruments, tools, machines, and buildings
2. Owners of capital earn Interest
In accounting, “capital” is the money that the shareholder puts into the business. In economics,
“capital” means the physical equipment used in the production process.
Eg. I use a laptop to write these notes and I sit on a chair at my desk. The laptop, chair and desk
are capital inputs in the production of this university education service
4. Entrepreneurship
1. Organizes land, labour, and capital (generates the ideas for production % bears the
risks)
2. Entrepreneurs earn Pro t
Types of Output:
• Goods (approx. 1/3 of all output in the economy is goods)
◦ Durable Goods- lasts a long time: cars, microwaves, fridges etc. They provide us with
a service and in that way are also called investments. We yield a rerun from the
purchase of these goods eg transport from cars, accommodation from a house etc.
◦ Semi-Durable Goods- Don’t last a long time: clothing, shoes, tyres etc.
◦ Non-Durable Goods- Once used, it cannot be used again: food, toothpaste etc.
• Services (approx. 2/3 of all output in the economy is a service)
Services are things that we experience. Your university training is an example of a service. At the
end of your studies you get a degree. You might say “that is a product” but that piece of paper
does not cost R300 000 to R400 000. THE SERVICE IS INTANGIBLE
◦ Financial Services (banks, insurance companies, etc.)
◦ Personal Services (doctors, lawyers, etc.)
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, ◦ Transport and Logistics (warehousing, trucking, etc.)
◦ Wholesale and Retail (supermarket, street vendor, etc.)
A substantial shift in employment patters is evident as the economy has developed (e.g. more
people work in services now than people 50 years ago)
Part B: Economic Systems
What is an economic system? Economic systems define the way in which people relate to each other in
an economic sense. The two most important characteristics of an economic system are
(1) how property rights are defined, and
(2) how decisions (especially regarding the three fundamental economic questions) are made.
Everything was derived from Leninism & Marxism, they are the foundation of communism. They split up
Into Maoism (Chinese version of communism) & Stalinism (ussr version of communism).
Economic Systems is the method that every society uses to answer the 3 basic economic questions
(What should we produce, how do we produce it, who benefits)
Traditional Economic System
- High levels of social mobility
- Very stagnant (showing no activity; dull and sluggish)
- This was the norm for most of human history ; Hunter-gatherers, subsistence farming,
agriculture etc.
- Extreme poverty
- Ownership of factors of production (Land, Labour etc.) determined by tradition and hereditary
transfer (There is no hierarchy of status everyone ‘value’ is roughly the same.)
- Almost no technological/economic advancement, religious and cultural beliefs trumped
economic advancement
- Highly predictable (gives security) , but in exible system
- Marx identi ed several stages in this traditional system:
• Primitive communism (hunter-gatherer communities): living o the land (contributed and
took from group)
• Slavery (Ancient & not-so-ancient societies): high status vs low status in society
• Feudalism (mainly Europe in the Middle Ages (500-1500AD): a feudal lord with serfs (lord was
able to use the serfs for any type of labour
Capitalism/ Market economic system(following the industrial revolution –
still living in the era of the industrial rev.)
- A market economy is an economic system where the economy is manipulated through supply
and demand with some government regulation and oversight may occur. The people are
sovereign (possessing supreme or ultimate power)
- An economic system where private property, markets and rms play a crucial role
• Privately owned and sold (buyers and sellers)
- Capitalism started in the late 18th century in England
• Disrupted the traditional economic system that was dominant
• Spread to Europe, North America, and the rest of the world during the 19th and 20th
centuries
- Capitalism is interpreted di erently amongst di erent countries
• Large di erences between US, China, and Northern Europe even though all are “capitalist”
Egs. The United States, England, and Japan
* Capitalism is the greatest economic system because it has numerous bene ts and creates
multiple opportunities for individuals in society. Some of these bene ts include producing
wealth and innovation, improving the lives of individuals, and giving power to the people.
Command (centrally planned) economic system: Started in 1917, Russia
tzar overthrown by Bolsheviks, Vladimir Lenin became leader of what is now
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, called Union os soviet socialist republics (USSR or soviet union) —> Bolshevik
Revolution
An economy owned and controlled by a government. The government is sovereign.
- The state owns and/or controls all factors of production (land, labour etc)
- The state makes all the decision
- The state is sovereign vs capitalism where the consumer is sovereign
• The state plans all the consumption and production
Egs. Belarus. Cuba. Iran. Libya. North Korea. Russia.
Mixed Economic Systems
A mixed economic system is made up of a combination of market (capitalistic), command
(centrally planned), and traditional market systems (part of the economy is more capitalist
whereas some parts are more traditional. E.g. Africa (SA is capitalist whereas Nigeria is more
traditional)
- All real-world economic systems are a mixture. However, the combination of the mixture di ers
among countries
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