1. Llad Phillips1 Introduction to Economics Microeconomics The US Economy

2. Llad Phillips2 Outline: Lecture Twelve The Wealth of Nations The Wealth of Nations  Adam Smith  The Wealth of Nations(1776) The Structure of the Economy The Structure of the Economy  Competition  supply curve for the firm

3. Llad Phillips3 What Accounts for Economic Growth? Why do some countries grow and prosper and others do not? Why do some countries grow and prosper and others do not? Why do civilizations rise and fall? Why do civilizations rise and fall? What determines the economic well-being of US citizens What determines the economic well-being of US citizens

4. Llad Phillips4 Perspectives on Growth Growth of Output: Measurement Growth of Output: Measurement Growth of Inputs: Measurement Growth of Inputs: Measurement  labor  index  manhours  persons engaged in private economy  capital  index  total input factors  index Focus: Growth in Size of the Economy Focus: Growth in Size of the Economy

5. Llad Phillips5 Perspectives on Growth Growth of Productivity: Measurement Growth of Productivity: Measurement  growth of output per input  output per manhour  output per unit of capital input  output per unit of total inputs Growth in Welfare of Average Citizen Growth in Welfare of Average Citizen

6. Llad Phillips6 Output Varies with Capital, Labor Q = f(L, K) output per worker varies with capital per worker output per worker varies with capital per worker  Q/L = f(K/L)

7. Llad Phillips7 source: US Department of Commerce, Long Term Economic Growth(1966)

8. Llad Phillips8 Labor Input Index Index Manhours Manhours Persons Persons

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12. Llad Phillips12 Capital Input Index Index

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14. Llad Phillips14 Capital Stock Depreciation Net Investment - Gross Investment + Capital Formation Savings

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17. Llad Phillips17 Conclusions Real GNP is Growing Real GNP is Growing Inputs Are Growing Inputs Are Growing  Labor  Capital

18. Llad Phillips18 Productivity Growth Output per Unit Input Output per Unit Input  labor  capital

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20. 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

21. 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 workers output 

22. Llad Phillips22 Capital Deepening capital per worker increases capital per worker increases so output per worker increases so output per worker increases

23. Llad Phillips23 Average, Marginal Product Input, # of workers APL MPL 1954 Things Improve: Output per Worker MPL 1874 Labor Supply 1874 Real Wage 1874 L 1874 Labor Supply 1954 L 1954 Real Wage 1954

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27. Llad Phillips27 Total Factor Productivity

28. Llad Phillips28 What is the Source of the Wealth of Nations? capital per worker capital per worker  K/L growing, increasing (GNP) per worker technological change technological change  invention  importance of educated work force education and the public sectoreducation and the public sector  innovation  entrepreneur infrastructure infrastructure  transportation  communications a caring family a caring family

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31. Llad Phillips31 Part II: Competition/Supply Output:Inputs Output:Inputs  output:labor  average product of labor  marginal product of labor Output:Costs Output:Costs  output:variable cost  average variable cost  marginal cost  output:fixed cost  output:total cost  total cost=variable cost + fixed cost

32. Llad Phillips32 Output Input Bushels of Tomatoes number of workers Production Function Total Product Curve Variable cost = number of workers* wage  A B A B Variable Cost Curve 1. average variable cost, AVC, is minimum, A, where APL is maximum, A 2. marginal cost, MC, is infinite, B, where MPL is zero, B 3. At A, APL = MPL, and at A, AVC = MC 4. The range of production for the firm is between A and B, or A and B Variable Cost Curve is the Mirror Image of Total Product Curve

33. Llad Phillips33 A B $ Variable Cost   Output Average Variable Cost, AVC Marginal Cost, MC Output AVC MC $ per unit output

34. Llad Phillips34 A B Variable Cost Fixed Cost Output Average Variable Cost, AVC Marginal Cost, MC Average Fixed Cost, AFC Output AVC MC Fixed Cost AFC Variable Cost $ per unit output $

35. Llad Phillips35 A B Variable Cost Fixed Cost Total Cost Output Average Variable Cost, AVC Marginal Cost, MC Average Fixed Cost, AFC Output AVC MC Fixed Cost AFC Total Cost ATC Variable Cost $ $ per unit output

36. Llad Phillips36 If the Firm Is One of Many Suppliers then the firm is a price taker, and the price for output is the market price, p M then the firm is a price taker, and the price for output is the market price, p M gross revenue, R, for the firm is the product of the given market price, p M, and the amount the firm produces, Q gross revenue, R, for the firm is the product of the given market price, p M, and the amount the firm produces, Q  R = p M *Q average revenue, or revenue per unit of output produced is the market price average revenue, or revenue per unit of output produced is the market price  R/Q = p M Since price does not depend on the output of this firm, marginal revenue equals average revenue Since price does not depend on the output of this firm, marginal revenue equals average revenue

37. Llad Phillips37 A B Variable Cost Fixed Cost Total Cost $ Output Average Variable Cost, AVC Marginal Cost, MC Average Fixed Cost, AFC Output AVC MC Fixed Cost AFC Total Cost ATC Break Even Point of Production for the Firm Q BE C Revenue pMpM Variable Cost P M = Min ATC $ per unit of output

38. Llad Phillips38 A B Variable Cost Fixed Cost Total Cost $ Output Average Variable Cost, AVC Marginal Cost, MC Average Fixed Cost, AFC Output AVC MC Fixed Cost AFC Total Cost ATC Shut Down Point of Production for the Firm Q SD C Revenue pMpM Variable Cost P M = Min AVC $ per unit of output

39. Llad Phillips39 Managing Production for the Firm Break Even Point Break Even Point  revenue equals, i.e. covers, total costs  R = TC = VC + FC  p M = ATC =AVC + AFC Shut Down Point Shut Down Point  revenue equals, i.e. covers variable costs  note fixed costs remain even if you shut down  R = VC  p M = AVC =MC

40. Llad Phillips40 A B Variable Cost Fixed Cost Total Cost Output Average Variable Cost, AVC Marginal Cost, MC Average Fixed Cost, AFC Output AVC MC Fixed Cost AFC Total Cost ATC Profit Maximizing Point of Production for the Firm QQ C Revenue pMpM Variable Cost P M = MC

41. Llad Phillips41 Summary-Vocabulary-Concepts Adam Smith Adam Smith labor index labor index capital index capital index total factor index total factor index capital per worker capital per worker productivity productivity output per manhour output per manhour total factor productivity total factor productivity productivity residual productivity residual invention invention innovation innovation entrepreneur entrepreneur infrastructure infrastructure caring parents caring parents average variable cost average variable cost marginal cost marginal cost average fixed cost average fixed cost average total cost average total cost price taker price taker firm’s break even point firm’s break even point firm’s shut down point firm’s shut down point

42. Llad Phillips42 AFC AVC MC Q SD

43. Llad Phillips43 Midterm