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Introduction to Economics

Introduction to Economics. Microeconomics The US Economy. Outline: Lecture Eleven. Application of the Marginal Product of Labor the demand for labor the firm the market Marxism The Wealth of Nations. Demand for Labor on the Tomato Farm.

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Introduction to Economics

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  1. Introduction to Economics Microeconomics The US Economy

  2. Outline: Lecture Eleven • Application of the Marginal Product of Labor • the demand for labor • the firm • the market • Marxism • The Wealth of Nations

  3. 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 APL, average product of labor MPL, w/p w/p MPL, marginal product of labor L Man-Days on Tomato Farm

  4. Profit Maximizing Demand for Labor • Why set the real wage equal to the marginal product of labor? • real wage = nominal wage/price of output • marginal product of labor = the increase in output for the last worker hired

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

  6. Profit Qmax 0 Lmax Loss profits are maximum where slope of the total product curve equals slope of total real costs

  7. 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 APL, average product of labor MPL, w/p w/p MPL, marginal product of labor L Man-Days on Tomato Farm

  8. What Determines the Real Wage? The Labor Market Demand for Labor on Tomato Farms in the Region MPL Farm A MPL Farm B MPL, w/p a LB LA LA + LB Man-Days

  9. Demand for Labor on Tomato Farms in the Region MPL Farm A MPL, w/p MPL Farm B a Market Demand for Labor b LA LB LA + LB Man-Days

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

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

  12. Suppose Someone Wants to Improve the Lot of Farmworkers • set a minimum wage below the market wage • no problem • at the minimum wage, farmers demand more man-days than supplied, so they bid the wage up

  13. Market Demand for Labor on Tomato Farms in the Region; Market Supply of Labor for Tomato Farms in the Region MPL, w/p Market Supply of Labor Market Real Wage Minimum Wage Market Demand for Labor LS LD Man-Days at the minimum wage, man-days demanded, LD, exceed man-days supplied, LS, and farmers will offer higher wages to farmworkers

  14. Improving the Lot of Farmworkers • set a minimum wage above the market wage • problem; whose ox gets gored? • at the minimum wage, farmers demand fewer man-days than supplied. • some farm workers will not find work: unemployed • those farm workers who are working will enjoy a higher wage

  15. Market Demand for Labor on Tomato Farms in the Region; Market Supply of Labor for Tomato Farms in the Region MPL, w/p Market Supply of Labor unemployed Minimum Wage Market Real Wage Market Demand for Labor LD LS Man-Days at the minimum wage, man-days supplied, LS, exceed man-days demanded, LD, and some farm workers can not find employment

  16. 1836 Karl Marx 1861

  17. Marx’s Dwelling: 28 Dean Street Soho, London

  18. Icon of the 60’s

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

  20. Karl Marx’s Capitalism Labor Capital displaces labor Output Capital Stock Technology is Labor Saving

  21. Karl Marx’s Capitalism Labor Capital displaces labor Output Capital Stock Technology is Labor Saving

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

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

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

  25. Marx: Exploitation of Working Class Note: Ignoring Fixed Costs, Real Profits = Output - Wage Bill, /p = Q - (w/p)L so real profits per worker equals: [/p]/L = Q/L - (w/p) = APL - MPL

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

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

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

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

  30. Class Conflict • Karl Marx • class conflict is economic conflict • capitalists versus workers • Thomas Malthus & David Ricardo • class conflict is economic conflict • landlords versus workers

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

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

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

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

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

  36. Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor Minks Beavers Production Function 2 2 Production Function 1 1 Days Days 6 6 3 3 Beaver Days 6 Labor Constraint 3 450 Mink Days 6 3

  37. Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor Beavers Production Function 2 1 Beaver Days Minks 6 3 1 2 450 3 Labor Constraint Production Function 6 Mink Days

  38. 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

  39. 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

  40. source: Lecture Six

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

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

  43. 1995 GDP per Capita in US $ : US, $27600; Japan, $ $21400 : Brazil, $6100; Mexico, $7700 : India, $1500; China, $2900; Egypt, $2800 : Saudi Arabia, $ 10,100 : Zaire, $400; Madagascar, $820; Cuba, $1300 Source: http://www.odci.gov/cia/publications/pubs.html

  44. Source: CIA

  45. Aggregate Production Function,showing the effect of increasing capital and land from K1 to K2 Output, Q Value Added Q = f(L, K2) Q = f(L, K1) Input, Labor, L Source: Lecture Six, National Accounting

  46. source: US Department of Commerce, Long Term Economic Growth(1966)

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

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

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