Introduction to Economics

1. Introduction to Economics Microeconomics Monopoly The World Economy

2. Econ 109 Llad Phillips 11/19/98 Example Questions for the Final III. (40 points) Answer all four questions. 1. The curves below illustrate the average product of labor, APL, and the marginal product of labor, MPL, for a developing country. The annual rate of growth of population in this agricultural country is high, and technological progress is negligible. a. Illustrate the fact that the working population in this “Malthusian” country is at the subsistence wage. b. What keeps the workers at a subsistence wage? c. Label the portion of total output going to labor as the “wage bill”. d. What is the total output of the country? Label it on the graph. e. The difference between the total output and the wage bill is the output going to the landowner class. Label it on the graph.

3. The Brief for Microsoft • The case for monopoly: Joseph Schumpeter • Growth is the key to social welfare • Large and growing firms reinvest profits in future growth • capital deepening • Large and growing firms have the resources to invest in research and development • technological change improves productivity

4. The Brief for Microsoft • Consumers have not been hurt by Microsoft • In contrast, consumers have benefited • Any market power Microsoft has is tenuous in the rapidly growing and changing software industry

5. Against Microsoft predatory behavior towards competitors acting in restraint of competition For Microsoft may have hurt competitors but not “competition” consumers have benefited because of Microsoft and have certainly not been hurt Microsoft Trial

6. Microsoft Trial • Slate Magazine • http://www.slate.com • The Microsoft Trial • Message #10: Nov. 13, 1998 • From: Jodie T. Allen • To: Slate - dispatch • Jodie T. Allen is Slate's Washington editor. • Day 16 of the Trial

7. I will not pretend to be an objective observer of the Microsoft trial. You wouldn't believe me if I did. Unlike my predecessors in this assignment, I am bound by ties, both sympathetic and financial, to the corporation whose rise to power and affluence has earned it the enmity of the Justice Department's antitrust division. My early working years as a computer model builder in the era of IBM hegemony also gave me a strong appreciation for the virtues of compatibility. And I grew up rooting for the Yankees.

8. For a Microsoft retainer, this might seem to be a pretty good day for a courtroom visit. Microsoft spent the morning in full attack on Steven McGeady, the Intel executive who has charged that Microsoft strong-armed Intel into abandoning work on Native Signal Processing--a multimedia software project McGeady managed--and pressured the chipmaker to stay out of software programming in general. It displayed a string of e-mails and memos between and among Microsoft and Intel executives plus McGeady's own handwritten notes. Some were long and dull, some short and amusing. One, a note from Intel CEO Andrew Grove to Microsoft CEO Bill Gates after a July 1995 dinner they shared concludes with a "smiley face."

9. Outline: Lecture Fourteen-Trade • The Western Movement: Manifest Destiny • Autarchy • self-sufficiency • The Advantages of Exchange • specialization • The Political Economy of Trade • Arguments for Free Trade • Arguments Against Free Trade

10. Autarchy • Self-Sufficient Economy • only trade within a region • Sioux, Pawnees etc. were self-sufficient • hunted and gathered their food • roamed the land and moved their homes • made their clothes • early settlers were self-sufficient: home production • grew their food • cleared the land and built their homes • made their clothes

11. Autarchy-continued • West of the Alleghanies • opened up to trade by Erie canal

12. Erie Canal Completed in 1825

15. Production Functions, Labor Constraints and the Production Possibility Frontier: Land is a Fixed Factor; Diminishing Returns Agriculture Production Possibility Frontier Production Function with diminishing returns relative price of agricultural goods to manufactured goods depends on demand as well as supply Labor for Agriculture Manufactures 450 Labor Constraint Production Function with diminishing returns Labor for Manufactures Source: Lecture Eleven

16. Isolated West Production Possibility Frontier, PPF Agriculture Regional Tastes: manufactures are scarce and hard to make, i.e. valuable Manufactures

17. The Slope of the Production Possibility Frontier • Recall: the slope of the production possibility frontier reveals relative values • rate of exchange: 2 beaver pelts for every mink pelt • if beaver pelts sell for 1 dollar, then mink pelts are worth 2 dollars

18. Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor Beavers Production Possibility Frontier Production Function 2 One mink is worth, or trades for, two beavers: prices are determined by labor inputs 1 Beaver Days Minks 6 3 1 2 3 450 Labor Constraint Production Function 6 Mink Days source: Lecture Eleven

19. slope: ∆B/∆M = 2 = PM/PB = MCM/MCB Beavers 2 1 1 Minks

20. Isolated West Production Possibility Frontier, PPF Agriculture Regional Tastes: manufactures are scarce and hard to make, i.e. valuable QAg QMf Manufactures steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear

21. Trade for a Small Region • The West takes Eastern trade prices as given • after canals open up transportation and goods are exchanged • In the East, manufactures are more plentiful and agricultural goods are scarcer • ∆Ag/∆Mf = PMf/PAg , is less steep, i.e in the East, manufactures are less expensive relative to agricultural goods • the East has a comparative advantage in manufactures and the West has a comparative advantage in agriculture

22. West Trades with the East Production Possibility Frontier, PPF Eastern Prices: ∆Ag/∆Mf = PMf/PAg Agriculture Regional Tastes: Manufactures steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear

23. Trade Allows the West to Specialize in Agriculture Production Possibility Frontier, PPF Eastern Prices: ∆Ag/∆Mf = PMf/PAg Agriculture Regional Tastes: Specialize in Ag at B B A Manufactures steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear

24. Trade Permits the Decoupling of Consumption from Production • In the self-sufficient West, people had to produce what they consumed. • When trade opened up with the East, the West could specialize in producing agricultural goods and import, i.e. trade for manufactures

25. Trade Allows the West to Decouple Production & Consumption Production Possibility Frontier, PPF Eastern Prices: ∆Ag/∆Mf = PMf/PAg Agriculture QAg Regional Tastes: B Exports C CAg A Imports CMf QMf Manufactures

26. Specialization

27. Retrospective • West better off with trade than with autarchy • with trade it consumes more of agricultural and manufactured goods • because of advantages of specialization • We don’t question the benefits of exchange within nations, only betweeen nations • trade is not an economic problem, quite the contrary it is an economic benefit • trade may be posed as a perceived political problem, reflecting nationalism and jingoistic attitudes

28. Can’t compete with low wages abroad jobs are lost abroad need to protect infant industries need to protect strategic industries excessive specialization unfair competition Consumers gain from more goods competition keeps industry progressive International Trade: Pro & Con Pro Con

29. Whose Ox Gets Gored? Western Manufacturers Lose Jobs Production Possibility Frontier, PPF Eastern Prices: ∆Ag/∆Mf = PMf/PAg Agriculture Regional Tastes: Manufactures steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear

30. Single Commodity Dependent Economies

31. Labor Costs • Recall: demand for labor: real wage equals marginal product of labor • i.e.: w/pQ = MPL • or pQ = w/MPL= w/(∆Q/∆L)=w∆L/∆Q =MC • wage relative to labor productivity that counts in determining the marginal cost of production • Unit labor costs: wage bill per unit of output • average: wL/Q = w/APL • margin: w/MPL

34. Adam Smith The Wealth of Nations (1776) • opposes mercantilism: state protectionism through quotas and tariffs • advocates specialization, division of labor • benefits of competition: invisible hand David Ricardo The Principles of Political Economy and Taxation (1817) • The Law of Comparative Advantage • The Law of Diminishing Returns

43. autarchy/self-sufficiency production possibility frontier exchange of goods comparative advantage specialization export import infant industry strategic industry unfair competition single commodity economy unit labor cost mercantilism division of labor invisible hand law of comparative advantage Adam Smith David Ricardo regionalization European Union China: special economic zones market size Summary-Vocabulary-Concepts