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Lecture 3

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Dan Silver

SOCB42H3 Lecture 3 September 26, 2011 Announcements: ➢ Essay Assignment ○ Only refer to wealth of nations for this assignment ○ Will be posted on blackboard Agenda: (Adam Smith) – Commercial Society ○ Money ○ Markets – Distribution of Wealth ○ Origin of Wealth ○ Inequality ○ Conflict Summary of last week’s lecture: – Propensity to Trade MarketsDOLSkilled labor – Propensity to Better ConditionSavingCapital AccumulationHigher proportion of productive workers ○ Both these things lead to National WealthCommercial Society ➢ Smith Quote on Commercial Society: In society, every person lives by change… becomes to be a commercial society What are the rules that make trading work: Money and Markets Why does money exist? 1. Limits of barter • Having barter is very restrictive and doesn’t allow markets to grow. Ex: I have a cow you have a pig, I don’t want the cow and you don’t want the pig. So we can’t trade and grow. 1. Money is the answer because it allows people to trade because money is what everybody wants. 2. What quality makes an object/candidate good to trade? a) It should last ex: gold b) It should be divisible 4. Consequences of the use of money: Use value vs. exchange value ➢ Smith definition page 41: The word value is to be observable and sometime expresses …the one maybe called in use, the other in exchange... frequently little or no value in exchange • Money tends to expand its distinction to more and more different objects • Because money you can trade with anyone for anything • You have to determine the use value and the exchange value such as art, education and talking to friends • The use value and exchange value in something creates the possibility that the market price of something is going to be very different then that of the use value • Gravitational force governs the movement of people in the world which is used as an analogy for use and exchange value Market: Who gets what, who does what, who decides that in a market? • Natural Price: Smith 80-82: is however much it costs to bring something to the market itself, the wages you have to pay to people, rent you have to pay=the normal profit you might take from what your selling, the part you take out of what you sell as the being the producer ○ Side note: Smith believes that the amount of labor that goes into producing something is what determines how “natural” prices are determined • Market Price: However much you actually sell something for. That often is different from the natural price. Smith states, people tend to adjust their behavior to bring those two in line with the other. This is where he uses the metaphor for of gravitational force. Smith says: people trading goods for money is not a random activity, it has an order. The question is what are those gravitational forces (laws of the market)? ○ Law of supply and demand ○ Demand: Inverse relationship between the prices of good and the price which buyers are willing to purchase it for. The higher the price the less willing the customer is to buy that product ○ Supply: direct relationship between the price of a good and the amount of it offered for sale. The higher the price the more willing a seller would sell that thing. ○ Effectual demand: not only do you want something but you have the money to pay for it. If you don’t have enough money to buy a Lexus your desire to buy it is irrelevant ○ If the demand is larger than the supply than producers will rush in to sell that ○ If supply is larger than the demand then price will go down  Way too much supply then other people selling the same stuff wont be able to sell them and try to find something else. ○ THM: All these activities are coordinated in a place together What you need for the market order to work well? (Freedoms) • Liberty of motion: you have to be able to go out and sell what you have • Liberty to change jobs: • Good information: you have to good information about the prices in the market you will be able to better assess where to invest and market your products What blocks these freedoms from occurring? • Concealing high profits: • Have trade secrets: if you keep a secret about something unique in the market, and only you know, then you can profit more from it and not others • Scarcity: • Monopoly if there’s two giant Christmas tree companies they both will adjust the price • Certification: if you need a certificate to sell something and for example only 1000 people have it then there wont be fair distribution of who profits except those who have the certification • When prices are extremely high (artificially money), people will get into that business because its easy money and wont be able to focus their energy into doing something they like and pursuing their talents. We don’t develop talents in the way that is optimal to suit people’s needs • If all talented people start going into the Christmas tree business
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