Introduction to Economics

1. Introduction to Economics Microecomomics The US Economy

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

3. 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. Two Competing Faiths • Science and technology will increase productivity and bring prosperity • versus • Earth’s resources are limited and in danger of being destroyed

5. Yucca Flats

6. Eniwetok

7. Spaceship Earth

8. Outline: Lecture Eleven • Malthus, Ricardo • the Law of Diminishing Returns • Production • Input-Output Relationships • Guidelines for Managing Production International Society of Malthus; link Ch.2 http://www.igc.org/desip/malthus/index.html

9. Malthusian Prediction • Population would increase until it existed on a subsistence wage: Poor can not be helped • Thomas Malthus, Parson • Essay on the Principle of Population(1798) • 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. Malthusian Growth Model: Some Resources are Limited Population if labor earns more than subsistence wage then population increases Production of Income because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

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

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

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

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

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

16. Perspective • Total Output

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

18. Malthusian Story • What if wages to peasants exceeds the subsistence level of wages? • surplus

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

20. Malthusian Story • 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 • Output increases, but less than proportionally

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

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

23. Malthusian World • Thomas Carlyle • economics is the “dismal science” • 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. Malthusian Growth Model: Some Resources are Limited Population if labor earns more than subsistence wage then population increases Production of Income because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

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

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

27. Perspective • Average Product

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

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

30. B Output, Total Product A Total Product Curve 12 bushels Bushels of Tomatoes 10 bushels   Input 5 workers 8 workers number of workers Average Product Bushels of Tomatoes Per Worker A 2 B 1.5 Average Product Curve Input, # of workers 5 workers 8 workers

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

32. B Output, Total Product A Total Product Curve 12 bushels Bushels of Tomatoes 10 bushels   Input 5 workers 8 workers number of workers Average Product Bushels of Tomatoes Per Worker A 2 B 1.5 Average Product Curve Input, # of workers 5 workers 8 workers

33. B Output, Total Product A Total Product Curve 12 bushels Bushels of Tomatoes 10 bushels   Input 5 workers 8 workers number of workers Average Product Bushels of Tomatoes Per Worker A 2 B 1.5 Average Product Curve Input, # of workers 5 workers 8 workers

34. Perspective • Marginal Product • change in output for a unit change in input

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

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

37. B Output, Total Product A Total Product Curve 12 bushels Bushels of Tomatoes 10 bushels   Average, Marginal Product Input 5 workers 8 workers number of workers Marginal Product Curve Bushels of Tomatoes Per Worker A 2 B 1.5 Average Product Curve Input, # of workers 5 workers 0 8 workers

38. Operating Range For the Firm • 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 • Suppose marginal product exceeds average product, MP > AP =Q/L • if labor is paid its marginal product • then w/ pQ > Q/L • and so wL > pQ Q • i.e. variable costs exceed gross revenue, and you would not cover operating costs

39. Average, Marginal Product Marginal Product Curve Average Product Curve Bushels of Tomatoes Per Worker A 2 B 1.5 Input, # of workers 5 workers 8 workers Operating Range of the Firm: A through B

40. Implication • 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. Malthusian Model Average, Marginal Product Marginal Product Curve Average Product Curve A B Subsistence Wage Input, # of workers Sustainable # of workers

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

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

44. Articles of faith • 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?

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