• Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. ... Under mercantilism, nations frequently engaged their military might to ensure local markets and supply sources were protected, to support the idea that a nation's economic health heavily relied on its supply of capital.
  • It basically meant that gold and silver determined the wealth of a country and governments would do anything to have the most of those
  • The "father" of classical economics is Adam Smith.
  • He proposed that a country's wealth is based on the goods and services it produces not the gold and silver it has (GDP)
  • He also wrote about how productivity and production could be increased
  • Contrary to earlier thought this time wealth is not generated by acquiring more gold or silver but rather by producing more output
  • Price of a good = value of all the labour used into making it
  • Competition between private producers leads to efficiency as producers seek to increase profit margins
  • Utility is the satisfaction a consumer gets by consuming a product
  • Adam Smith supported a free market where competition leads to full employment of resources and the economy boosting
  • He advocated that countries specialise in making the goods they are good at producing, and to export their surpluses and to import other goods as one country can not produce everything it needs
  • Laissez-Faire theory is used to refer to the capitalistic economic system where there is barely any government intervention
  • In Smith's view, government responsibilities include defence, universal education and the provision of roads and bridges, along with penal laws.
  • The Invisible Hand is an economic concept that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests.
  • Classical Economics
    • Smith focused on "absolute advantage" which says one country is way more efficient in producing a commodity than another country
    • According to to Say's law, production of goods that is actually the source of all demand in an economy. "Supply creates its own demand"
    • Production generates income, income creates demand and this would be demand cycle
  • Neoclassical Economics

    • Rejected labour theory which concludes that the value of a product is determined by the cost of the FOPs (emphasis on production)

    • Value of a good is determined by the value that consumers place on the good and the amount of utility it brings them (emphasis on demand)

    • Marginal decision is consumers decide whether to consume the next unit of a good depending on utility and producers choose whether to consume the next unit depending on the production cost.

    • Law of diminishing marginal utility says that the next unit always gives you less utility as the first one. If you're thirsty the pleasure the first bottle of water gives is not the same as the pleasure derived from the 3rd bottle.

    • Neoclassical Economists put more emphasis on the demand side, and created functions to explain the interaction of supply and demand.

    • Marshall First visually presented the supply and demand curves

    • Marshall used diagrams to explain his theories

    • Consumers are assumed to want maximum utility and producers are assumed to want maximum profits

    • Assumptions built into the neoclassical model are referred to as "rational choice theory" (Consumers have full information and make the judgment instantly about the marginal utility of consuming another unit of the product)

  • Karl Marx saw "capitalism", the free market system as only one of the many methods of production, he predicted that there would a breakdown of capitalism and communism would be the end result
  • Marxism is a social, political, and economic philosophy named after Karl Marx. It examines the effect of capitalism on labor, productivity, and economic development and argues for a worker revolution to overturn capitalism in favour of communism.
  • Marx wrote that the power relationships between capitalists and workers were inherently exploitative and would inevitably create class conflict.
  • He believed that this conflict would ultimately lead to a revolution in which the working class would overthrow the capitalist class and seize control of the economy.