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Llad Phillips1 Introduction to Economics Microecomomics The US Economy.

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Presentation on theme: "Llad Phillips1 Introduction to Economics Microecomomics The US Economy."— Presentation transcript:

1 Llad Phillips1 Introduction to Economics Microecomomics The US Economy

2 Llad Phillips2 Neo-Malthusian Ideas “Population Fatigue” “Population Fatigue”  More people dying  India  Ethiopia  Pakistan  Nigeria These countries are having trouble caring for increasing numbers of children These countries are having trouble caring for increasing numbers of children  falling water tables, deforestation, erosion

3 Llad Phillips3 How 'Demographic Fatigue' Will Defuse the Population Bomb “ It was 200 years ago that English cleric Thomas Malthus warned that unchecked population growth could lead to famine, disease and conflict. His reasoning was simple: populations tend to increase faster than food supplies. “ Source: Newsweek,

4 Llad Phillips4 Two Competing Faiths Science and technology will increase productivity and bring prosperity Science and technology will increase productivity and bring prosperity  versus Earth’s resources are limited and in danger of being destroyed Earth’s resources are limited and in danger of being destroyed

5 Llad Phillips5 Yucca Flats

6 Llad Phillips6 Eniwetok

7 Llad Phillips7 Spaceship Earth

8 Llad Phillips8 Outline: Lecture Eleven Malthus, Ricardo Malthus, Ricardo  the Law of Diminishing Returns Production Production Input-Output Relationships Input-Output Relationships Guidelines for Managing Production Guidelines for Managing Production International Society of Malthus; link Ch.2

9 Llad Phillips9 Malthusian Prediction Population would increase until it existed on a subsistence wage: Poor can not be helped Population would increase until it existed on a subsistence wage: Poor can not be helped Thomas Malthus, Parson Thomas Malthus, Parson  Essay on the Principle of Population(1798) Combined Two Ideas Combined Two Ideas  Ben Franklin had noticed population in the colonies was growing exponentially, doubling every 25 years  David Ricardo argued that land was a fixed resource in England so that more labor would yield more output, but at a diminishing rate

10 Llad Phillips10 Population Production of Income Malthusian Growth Model: Some Resources are Limited if labor earns more than subsistence wage then population increases because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

11 Llad Phillips11 Malthusian Worries Today Is population growing too fast in some developing countries? Is population growing too fast in some developing countries?  Does the burgeoning population eat up any income gains? Is world population growing too rapidly? Is world population growing too rapidly?  Will it exhaust natural resources? Are we running out of natural resources? Are we running out of natural resources?  coal  oil  rain forests  clean oceans

12 Llad Phillips12 Logical Basis of the Worry Limited resources on “spaceship earth” Limited resources on “spaceship earth” Science and technology may not be able to rescue us from these limitations Science and technology may not be able to rescue us from these limitations

13 Llad Phillips13 Law of Diminishing Returns One or More Inputs Fixed One or More Inputs Fixed Variation of Total Product with Variable Input Variation of Total Product with Variable Input Example: Example:  output: amount learned  variable input: hours spent studying  fixed input: human condition, attention span

14 Llad Phillips14 Law of Diminishing Returns Agricultural Example Agricultural Example  output: bushels of tomatoes  fixed input: 1/8 acre of land  variable input: number of workers tending tomatoes

15 Llad Phillips15 Output Input Bushels of Tomatoes number of workers Production Function Total Product Curve

16 Llad Phillips16 Perspective Total Output Total Output

17 Llad Phillips17 Output Input Food number of workers Production Function for the Malthus Society Total Product Curve Subsistence Wages

18 Llad Phillips18 Malthusian Story What if wages to peasants exceeds the subsistence level of wages? What if wages to peasants exceeds the subsistence level of wages?  surplus

19 Llad Phillips19 Output Input Food number of workers Production Function Total Product Curve Subsistence Wages Peasant Surplus Peasant Wages

20 Llad Phillips20 Malthusian Story If peasants have a surplus, more of them marry, form families, have children, and consume the surplus If peasants have a surplus, more of them marry, form families, have children, and consume the surplus Population increases and the number of workers increases Population increases and the number of workers increases Output increases, but less than proportionally Output increases, but less than proportionally

21 Llad Phillips21 Output Input Food number of workers Production Function Total Product Curve Subsistence Wages Peasant Surplus Peasant Wages population (worker) increase

22 Llad Phillips22 Output Input Food number of workers Production Function Total Product Curve Subsistence Wages Peasant Surplus Peasant Wages population (worker) increase maximum population

23 Llad Phillips23 Malthusian World Thomas Carlyle Thomas Carlyle  economics is the “dismal science” Thomas Hobbes, Leviathan(1651) Thomas Hobbes, Leviathan(1651)  [In nature there is] continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.

24 Llad Phillips24 Population Production of Income Malthusian Growth Model: Some Resources are Limited if labor earns more than subsistence wage then population increases because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

25 Llad Phillips25 Politics Who gets the rest of the output? Who gets the rest of the output?  landowners (landed aristocracy)  basis of feudal society  basis of colonial countries Social tension between socio-economic classes Social tension between socio-economic classes

26 Llad Phillips26 Output Input Food number of workers Production Function Total Product Curve Subsistence Wages Peasant Surplus Peasant Wages Rent to the Landowners

27 Llad Phillips27 Perspective Average Product Average Product

28 Llad Phillips28 Output Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  tan  = 10 bushels/ 5 workers = 2 bushels per worker Total Product Curve

29 Llad Phillips29 Output Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  tan  = 10 bushels/ 5 workers = 2 bushels per worker B  tan  = 12 bushels/ 8 workers = 1.5 bushels per worker 8 workers 12 bushels Total Product Curve

30 Llad Phillips30 Output, Total Product Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  B  8 workers 12 bushels Average Product A Bushels of Tomatoes Per Worker B 5 workers 8 workers Input, # of workers Total Product Curve Average Product Curve

31 Llad Phillips31 Where Should You Produce? At point B, 8 workers, where total output is maximum? At point B, 8 workers, where total output is maximum? At point A, 5 workers, where average product is maximum? At point A, 5 workers, where average product is maximum? How many consecutive hours should you study? How many consecutive hours should you study?

32 Llad Phillips32 Output, Total Product Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  B  8 workers 12 bushels Average Product A Bushels of Tomatoes Per Worker B 5 workers 8 workers Input, # of workers Total Product Curve Average Product Curve

33 Llad Phillips33 Output, Total Product Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  B  8 workers 12 bushels Average Product A Bushels of Tomatoes Per Worker B 5 workers 8 workers Input, # of workers Total Product Curve Average Product Curve

34 Llad Phillips34 Perspective Marginal Product Marginal Product  change in output for a unit change in input

35 Llad Phillips35 Output Input Bushels of Tomatoes number of workers Production Function 3 4 ∆ = 1 worker 9 3 ∆ = 6 tomatoes, bushels Marginal Product equals 6 bushels of tomatoes Total Product Curve

36 Llad Phillips36 Marginal Product Bushels of Tomatoes Per Worker 6 0 Total Product Curve Marginal Product Curve Point of Diminishing Returns Input, # of Workers Bushels of bushels, bushels

37 Llad Phillips37 Output, Total Product Input Bushels of Tomatoes number of workers A 10 bushels 5 workers  B  8 workers 12 bushels Average, Marginal Product A Bushels of Tomatoes Per Worker B 5 workers 8 workers Input, # of workers Total Product Curve Average Product Curve Marginal Product Curve 0

38 Llad Phillips38 Operating Range For the Firm So, you only produce where marginal product is less than average product: MP < AP So, you only produce where marginal product is less than average product: MP < AP Note: there is no point producing where MP is negative, you would be throwing away some output, so produce where 0 < MP < AP Note: there is no point producing where MP is negative, you would be throwing away some output, so produce where 0 < MP < AP Suppose marginal product exceeds average product, MP > AP =Q/L Suppose marginal product exceeds average product, MP > AP =Q/L  if labor is paid its marginal product  then w/ p Q > Q/L  and so wL > p Q Q  i.e. variable costs exceed gross revenue, and you would not cover operating costs

39 Llad Phillips39 Average, Marginal Product A Bushels of Tomatoes Per Worker B 5 workers 8 workers Input, # of workers Average Product Curve Marginal Product Curve Operating Range of the Firm: A through B

40 Llad Phillips40 Implication Keep studying as long as the average amount learned per hour keeps increasing Keep studying as long as the average amount learned per hour keeps increasing  once the average amount learned per hour starts decreasing  then consider taking a break

41 Llad Phillips41 Average, Marginal Product A B Input, # of workers Average Product Curve Marginal Product Curve Malthusian Model Subsistence Wage Sustainable # of workers

42 Llad Phillips42 Average, Marginal Product Input, # of workers Malthusian Model: Biblical Feast and Famine Subsistence Wage Sustainable # of workers APL MPL Higher Wage Things Improve: Temporarily: (1) MPL increases, wage exceeds subsistence, population increases, (2) MPL falls back, excess population dies off: famine and pestilence

43 Llad Phillips43 Average, Marginal Product Input, # of workers Malthusian Model Subsistence Wage Sustainable # of workers APL MPL Higher Wage Things Improve: Permanently: MPL increases, wage exceeds subsistence, population increases, # of workers increases until MPL equals subsistence wage, Net result: more people are miserable.

44 Llad Phillips44 Articles of faith Can science and technology keep creating a surplus faster than population increases eat it up? Can science and technology keep creating a surplus faster than population increases eat it up? Will scarcity and limits to world resources combined with our rapacity ultimately doom us to a dead planet? Will scarcity and limits to world resources combined with our rapacity ultimately doom us to a dead planet?

45 Llad Phillips45 Summary-Vocabulary-Concepts Thomas Malthus Thomas Malthus David Ricardo David Ricardo law of diminishing returns law of diminishing returns variable input variable input fixed input fixed input subsistence wage subsistence wage Malthusian growth model Malthusian growth model total product curve total product curve average product of labor average product of labor marginal product of labor marginal product of labor point of diminishing returns point of diminishing returns real wage real wage operating range for the firm operating range for the firm Thomas Carlyle Thomas Carlyle Thomas Hobbes Thomas Hobbes


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