CLASSICAL ECONOMIC

DEVELOP IN THE 19th

CENTURY
By: Anisa Nabilah and Anisa Zafira.
 HOW?
Work of FAMOUS economist:

David Ricardo Thomas Malthus Stuart Mill Jean-Baptiste Say

 DAVID RICARDO
1. Well known for his work: “ International Trade” , similar to Smith
- agreed countries should specialize in production of different goods and trade freely to INCREASE global output.

HOWEVER:-
● Smith focused on “ Absolute Advantage”
- country is being compared to another country

1. Developed law of “Comparative Advantage”

- Basis of most international trade theory today.
JEAN-BAPTISTE
SAY
Is a French man who favour of free
market and free trades and was strongly
influenced by writings of Adam Smith.
He is also famous for “Say’s law of
market”.
 SAY’S LAW:
It is the production of goods that is actually the source of all demand
in an economy.

● Main theory: “supply creates its own demand”

- Linked to circular flow model
❖ TOTAL DEMAND IN ECONOMY= RESULT OF
PRODUCTION

● Argue: cannot be overproduction of goods within the economy

and that economic growth is achieved; Increasing production=
Generating further demand for products.
NEOCLASSICA
L SCHOOL OF
ECONOMICS
- Emerged in 1870, work of William
Jerons, Leon Walras and Carl
Menger.
 NEOCLASSICAL SCHOOL OF
ECONOMICS
NEOCLASSICAL
THEORIES
➔ Rejected labour theory of value
➔ Value of good is determined by value
that consumers place ; amount of
utility it brings them.
➔ Believed utility could be measured
and given monetary value .
CLASSICAL
THEORIES
➔ Value of product is
determined by costs of labour
and other inputs
➔ Focus: production side
 The Marginal Revolution

- Idea of marginal decision-making.

- The consumers decide whether to consume the next unit of a good depending on how
much utility that extra unit brings them.

- The producers decide whether to produce the next unit of a good depending on the extra
cost of producing that good.
Law of diminishing marginal utility
C

Classical economics Neoclassical economics

- z

- Considered supply and demand - Developed complex

separately mathematical functions to
explain the interaction
between supply and demand.

- Placed more importance on

- Placed more importance on the the demand side (rejecting the
supply side (belief in the labour labour theory of value)
theory of value)
Supply and demand diagram

Presented by Alfred Marshall in his Principles of Economics

(1890)

Supply
- Quantity of a good or service that producers are willing and able to
supply at different prices in a given time period.

Demand
- Quantity of a good or service that consumers are willing and able
to purchase at different prices in a given time period.
Assumptions made in building models to explain producer and consumer
behaviour ( rational choice theory )

Consumer Producer

- Maximize utility - Maximize profits

- Have full information about their - Able to calculate accurately the
options and able to make marginal cost of producing an
judgements instantly extra unit of a good