2. Llad Phillips1 Introduction to Economics Microeconomics The US Economy

3. Llad Phillips2 What Did We Learn from Malthus? n The Growing Population Gobbles Up the Surplus n The Oligarchy Rules n Economic Concepts u demand for labor is the marginal product curve u the supply of labor is the subsistence wage

4. Llad Phillips3 Demographic Externality: The Malthusian Future Consequence: Less Developed Countries Lag Consequence: Political Instability Consequence: Pressure on World Resources

5. Llad Phillips4 The Demographic Transition: Death Rates Fall Before Birth Rates

6. Llad Phillips5 Population: Stock of People Births: Inflow of New People Deaths: Outflow of People Net Flow + -

7. Llad Phillips6 Output Input World GDP World Population or number of workers Production Function Total Product Curve B

8. Llad Phillips7 The Malthusian Model: Summary n Applications of the model u Earth as a limited resource F too many people/too few trees/ global warming? u Third World Underdeveloped Countries F too many people/too few trees/famine & pestilence

9. Llad Phillips8 What Did We Learn From Malthus? nEnEnEnEconomic Concepts ududududemand for labor is the marginal product curve ututututhe supply of labor is the subsistence wage

10. Llad Phillips9 Marginal Product # of Workers Marginal Product Curve: Demand for Labor Average Product of Labor

11. Llad Phillips10 Total Output # of Workers Total Output Total Real Wage Bill Rent=Surplus Landowners Maximize the Surplus

12. Llad Phillips11 Marginal Principle n Set slope of wage bill equal to the slope of total product curve u I.e. set real wage = marginal product of labor

13. Llad Phillips12 Marginal Product # of Workers Marginal Product Curve: Demand for Labor Hires SubsistenceWage Supply Curve of Labor

14. Llad Phillips13 Marginal Product # of Workers Marginal Product Curve: Demand for Labor Average Product of Labor Surplus per worker

15. Llad Phillips14 Marginal Product # of Workers Marginal Product Curve: Demand for Labor Average Product of Labor Surplus per worker Area is the Rent

16. Llad Phillips15 Outline: Lecture Twelve n Economic Concepts from Lecture Eleven u Diminishing Returns u Marginal Product of Labor n The Malthusian Model: Summary n Marxism n The Wealth of Nations

17. Llad Phillips16 Economic Concepts from Your Reading n Diminishing Returns u Chapter 2 u Chapter 8 u Chapter 22

18. Llad Phillips17 PRINCIPLE of Diminishing Returns Chapter Two Slide Show

19. Llad Phillips18 Chapter Eight, Figure 8.1 Total Product Curve

20. Llad Phillips19 Chapter 22, Figure 22.1 Relationship between Labor and Output with Capital Fixed

21. Llad Phillips20 The Demand for Labor n To understand the demand for labor we use the marginal principle. Marginal PRINCIPLE Increase the level of an activity if its marginal benefit exceeds its marginal cost, but reduce the level if the marginal cost exceeds the marginal benefit. If possible, pick the level at which the marginal benefit equals the marginal cost.  Marginal benefit is the extra output that results when an additional unit of labor is hired.  Marginal cost is the real wage that a firm pays to hire an additional worker. Chapter 22 Slide Show

22. Llad Phillips21 The Demand for Labor n As long as the marginal benefit from an additional worker exceeds the marginal cost of that worker, firms will continue to hire additional workers.  The demand for labor is downward- sloping.  As the real wage falls, firms will hire more labor.

23. Llad Phillips22 Economic Concepts n Marginal product of labor u Chapter 2, p. 32: “the change in output from one additional worker” u Chapter 8, p. 166 “ ….Output increases at a decreasing rate, meaning the marginal product of labor decreases”

24. Llad Phillips23 Marxism n Critique of Capitalism

25. Llad Phillips24 1836 1861 Karl Marx

26. Llad Phillips25 Marx’s Dwelling: 28 Dean Street Soho, London

27. Llad Phillips26 Icon of the 60’s Radical Chic

28. Llad Phillips27 Karl Marx n Das Kapital (1867) n With industrialization, capital becomes more important, relative to land n Labor Theory of Value u labor is the source of all value n With innovation, capital replaces labor u labor saving machines u as capital replaces labor, the source of value is being displaced, profits fall n Exploitation of labor u displaced labor: reserve army of unemployed

29. Llad Phillips28 Karl Marx’s Capitalism Capital Stock Technology is Labor Saving Labor OutputCapital displaces labor

30. Llad Phillips29 Karl Marx’s Capitalism Capital Stock Technology is Labor Saving Labor OutputCapital displaces labor

31. Llad Phillips30 Karl Marx’s Capitalism Capital Stock Technology is Labor Saving Labor OutputCapital displaces labor

32. Llad Phillips31 APL APL, MPL Labor Input Subsistence Real Wage Demand for Labor Reserve Army of the Unemployed Supply of Labor MPL

33. Llad Phillips32 Marx Was Right About Labor Saving Capital and Technology n Workers left the Farms for the Cities n Workers Left Manufacturing for the Sevice Industries

34. Llad Phillips33 Marx Missed the Shift From One Kind of Employment to the Next

35. Llad Phillips34 Karl Marx n Capitalists exploit labor u the displacement of labor by labor-saving machines creates “reserve army of the unemployed”, technological unemployment u excess supply of workers willing to work at a subsistence wage u capitalists pocket the difference between the average product of labor, APL, and the marginal product of labor, MPL, as profit per employed worker n Eventually the workers revolt

36. Llad Phillips35 APL APL, MPL Labor Input Subsistence Real Wage Demand for Labor Reserve Army of the Unemployed Supply of Labor MPL APL - MPL =  /p)/L L # Employed Workers Exploitation of Labor: APL - MPL

37. Llad Phillips36 Marx: Exploitation of Working Class Note: Ignoring Fixed Costs, Profits = Value of output - wage Bill  = p* Q - w*L Real Profits = Output - Wage Bill in real terms,  /p = Q - (w/p)L so real profits per worker equals: [  /p]/L = Q/L - (w/p) = APL - MPL

38. Llad Phillips37 APL APL, MPL Labor Input Subsistence Real Wage Demand for Labor Reserve Army of the Unemployed MPL APL - MPL =  /p)/L L # Employed Workers Real Wage Bill = Subsistence Wage*L Supply of Labor S

39. Llad Phillips38 APL APL, MPL Labor Input Subsistence Real Wage Reserve Army of the Unemployed APL - MPL =  /p)/L L # Employed Workers S S D D Total Real Value of Output = APL*L = Q = (Q/L)*L

40. Llad Phillips39 APL APL, MPL Labor Input Subsistence Real Wage Reserve Army of the Unemployed APL - MPL =  /p)/L L # Employed Workers S S D D Total Real Value of Output = APL*L = Q = (Q/L)*L Real Wage Bill

41. Llad Phillips40 APL APL, MPL Labor Input Subsistence Real Wage Reserve Army of the Unemployed APL - MPL =  /p)/L L # Employed Workers S S D D Capitalists’ Real Profit Capitalist Exploitation of Workers: Class Conflict

42. Llad Phillips41 Class Conflict n Karl Marx u class conflict is economic conflict F capitalists versus workers n Thomas Malthus & David Ricardo u class conflict is economic conflict F landlords versus workers

43. Llad Phillips42 Stages of Economic Growth: Scarcity n Labor is the only scarce factor u land is plentiful u example: Mountain Men: trappers, Jim Bridger n Labor and Land are scarce factors u as population fills the area, land becomes scarce and people own title to the land F range wars: cattlemen versus sheepherders F landed aristocracy n Labor, Land and Capital are scarce factors u with industrialization, manufacturing may replace agriculture as the dominant industrial sector

44. Llad Phillips43 Labor Theory of Value n Depends on labor being the only scarce factor n Example: Unsettled West & Mountain Men u suppose it takes 3 days to trap a beaver u suppose it takes 6 days to trap a mink u with six days, Jim Bridger can trap one mink or two beavers u if the pelts are used as muffs, then mink muffs will cost twice as much as beaver muffs u prices only depend on supply, i.e. labor input not on demand

45. Llad Phillips44 Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor 3 6 Beaver Days 3 6 Days 1 2 Minks 3 6 Days 1 2 Beavers 3 6 Mink Days 45 0 Labor Constraint Production Function Production Function

46. Llad Phillips45 Mink Days 3 6 Beaver Days 36 45 0 1 2 12 Beavers Minks Labor Constraint Production Function Production Function Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor

47. Llad Phillips46 Mink Days 3 6 Beaver Days 36 45 0 1 2 12 Beavers Minks Labor Constraint Production Function Production Function Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor Production Possibility Frontier One mink is worth, or trades for, two beavers: prices are determined by labor inputs

48. Llad Phillips47 Labor for Manufactures Labor for Agriculture 45 0 Agriculture Manufactures Labor Constraint Production Function with diminishing returns Production Function with diminishing returns Production Functions, Labor Constraints and the Production Possibility Frontier: Land is a Fixed Factor; Diminishing Returns Production Possibility Frontier relative price of agricultural goods to manufactured goods depends on demand as well as supply

49. Llad Phillips48 What Happened to Marx’s Predictions? n Growing Immiseration of the working class n Revolution n Demise of capitalism

50. source: Lecture Six

51. Llad Phillips50

52. Llad Phillips51 Retrospective n Marx missed the fact that in 19th Century England, labor was not the only scarce factor u land and capital were scarce, i.e. valuable too, and commanded rent and profit n Malthus and Ricardo had a fairly accurate description of England at the beginning of the Industrial Revolution u they could not foresee how England would prosper from industrialization in the 19th and 20th centuries

53. Llad Phillips52 Both Malthus and Marx Missed Growth. What Accounts for Economic Growth? n Why do some countries grow and prosper and others do not? n Why do civilizations rise and fall? n What determines the economic well-being of US citizens

54. Llad Phillips53 Source: http://www.odci.gov/cia/publications/pubs.html : Zaire, $400; Madagascar, $820; Cuba, $1300 1995 GDP per Capita in US $ : India, $1500; China, $2900; Egypt, $2800 : Brazil, $6100; Mexico, $7700 : US, $27600; Japan, $ $21400 : Saudi Arabia, $ 10,100

55. Output, Q Value Added Input, Labor, L Aggregate Production Function,showing the effect of increasing capital and land from K 1 to K 2 Q = f(L, K 1 ) Q = f(L, K 2 ) Source: Lecture Six, National Accounting

56. Llad Phillips55 source: US Department of Commerce, Long Term Economic Growth(1966)

57. Llad Phillips56 SPAN GROWTH RATE Growth of Real Gross National Product source: US Department of Commerce, Long Term Economic Growth(1966)

58. Llad Phillips57

59. Llad Phillips58 Chapter 23, Figure 23.3 Percentage Contribution to Real GDP Growth

60. Llad Phillips59 Summary-Vocabulary-Concepts n Karl Marx n firm’s demand for labor n market demand for labor n market supply of labor n market clearing wage n minimum wage n industrialization n labor theory of value n technological unemployment n exploitation of labor n reserve army of the unemployed n class conflict n landed aristocracy n stages of economic growth n production possibility frontier n Malthus: output = real wages + real rents n Marx: output = real wages + real profits

61. Llad Phillips60 Man-Days on Tomato Farm MPL, marginal product of labor APL, average product of labor Demand for Labor on the Tomato Farm given the market wage in real terms, w/p, set real wage equal to marginal product of labor to determine the man-days, L, to hire to maximize profits MPL, w/p w/p L

62. Llad Phillips61 Demand for Labor on Tomato Farms in the Region: Sum of Demands for Labor by Farms MPL Farm A MPL Farm B LALA LBLB L A + L B a Man-Days MPL, w/p What Determines the Real Wage? The Labor Market

63. Llad Phillips62 Demand for Labor on Tomato Farms in the Region MPL Farm A MPL Farm B LALA LBLB L A + L B a b Market Demand for Labor MPL, w/p Man-Days

64. Llad Phillips63 Market Demand for Labor on Tomato Farms in the Region; Market Supply of Labor for Tomato Farms in the Region Market Clearing Wage Market Demand for Labor Man-Days MPL, w/p Market Real Wage Market Supply of Labor D D S S

65. 24 hours0 hours Leisure (learning) Earnings $240 $ 0 high low value high value Optimum 15 hours of leisure $90 for 9 hrs of work Individual Farm Worker’s Supply of Labor Source: Lecture Three

66. Llad Phillips65 Policy Issue n Minimum Wage

67. Llad Phillips66 Suppose Someone Wants to Improve the Lot of Farm-workers n set a minimum wage below the market wage u no problem F at the minimum wage, farmers demand more man-days than supplied, so they bid the wage up

68. Llad Phillips67 Market Demand for Labor on Tomato Farms in the Region; Market Supply of Labor for Tomato Farms in the Region Market Demand for Labor Man-Days MPL, w/p Market Real Wage Market Supply of Labor Minimum Wage LSLS LDLD at the minimum wage, man-days demanded, L D, exceed man-days supplied, L S, and farmers will offer higher wages to farm-workers

69. Llad Phillips68 Improving the Lot of Farm-workers n set a minimum wage above the market wage u problem; whose ox gets gored? F at the minimum wage, farmers demand fewer man-days than supplied. some farm workers will not find work: unemployedsome farm workers will not find work: unemployed those farm workers who are working will enjoy a higher wagethose farm workers who are working will enjoy a higher wage

70. Llad Phillips69 Market Demand for Labor on Tomato Farms in the Region; Market Supply of Labor for Tomato Farms in the Region Market Demand for Labor Man-Days MPL, w/p Market Real Wage Market Supply of Labor Minimum Wage unemployed LSLS LDLD at the minimum wage, man-days supplied, L S, exceed man-days demanded, L D, and some farm workers can not find employment

71. Llad Phillips70 Appendix

72. Llad Phillips71 Application: Demand Curve for Labor n Marginal Product of Labor

73. Llad Phillips72 Man-Days on Tomato Farm MPL, marginal product of labor APL, average product of labor Demand for Labor on the Tomato Farm given the market wage in real terms, w/p, set real wage equal to marginal product of labor to determine the man-days, L, to hire to maximize profits MPL, w/p w/p L

74. Llad Phillips73 Profit Maximizing Demand for Labor n Why set the real wage equal to the marginal product of labor? u real wage = nominal wage/price of output u marginal product of labor = the increase in output for the last worker hired n Wage Bill = real wage*workers

75. Llad Phillips74 Output, Q Input, L Bushels of Tomatoes number of worker-days Production Function Total Product Curve FC/ p Q Fixed Costs, FC/ p Q L*w/ p Q Real Wage Bill, L*w/ p Q Real Total Costs

76. Llad Phillips75 Profit Loss profits are maximum where slope of the total product curve equals slope of total real costs L max Q max 0

77. Llad Phillips76 Output Input World GDP World Population/number of workers Production Function Total Product Curve B A Average Product is Maximum Marginal Product is zero

78. Llad Phillips77 Output, Total Product Input number of workers A B Average, Marginal Product A B Input, # of workers Total Product Curve Average Product Curve Marginal Product Curve 0

79. Llad Phillips78 Application: Understanding Malthus n Cycles of Feast and Famine Accompanied By Die-Offs n Who Gets What: The landed aristocracy versus the workers n Average product and marginal product curve analysis

80. Llad Phillips79 Average, Marginal Product A B Input, # of workers Average Product Curve Marginal Product Curve Demand for Labor Malthusian Model Subsistence Wage Supply of Labor Sustainable # of workers

81. Llad Phillips80 Average, Marginal Product Input, # of workers Malthusian Model Subsistence Wage Sustainable # of workers APL MPL APL - MPL = Real Rent Per Worker Exploitation of Poor Workers by the Landed Aristocracy Real Wage Bill

82. Llad Phillips81 Average, Marginal Product Input, # of workers Malthusian Model Subsistence Wage Sustainable # of workers APL MPL APL - MPL = Real Rent Per Worker Exploitation of Poor Workers by the Landed Aristocracy Real Wage Bill Rent to the Landlords

83. Llad Phillips82 Land Ownership & Power n Feudal Times u land owned by monarchs and lords F lord provides protection in exchange for fealty from serfs n Europe u aristocracy continued to own land unless overthrown by revolution n Latin America u land owned by monarchs and aristocrats F land-grants u army, church, & landowners