Llad Phillips1 Introduction to Economics Microeconomics The US Economy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Llad Phillips17 PRINCIPLE of Diminishing Returns Chapter Two Slide Show

Llad Phillips18 Chapter Eight, Figure 8.1 Total Product Curve

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

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

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.

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”

Llad Phillips23 Marxism n Critique of Capitalism

Llad Phillips Karl Marx

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

Llad Phillips26 Icon of the 60’s Radical Chic

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Llad Phillips45 Mink Days 3 6 Beaver Days Beavers Minks Labor Constraint Production Function Production Function Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor

Llad Phillips46 Mink Days 3 6 Beaver Days 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

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

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

source: Lecture Six

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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

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

Llad Phillips53 Source: : Zaire, $400; Madagascar, $820; Cuba, $ GDP per Capita in US $ : India, $1500; China, $2900; Egypt, $2800 : Brazil, $6100; Mexico, $7700 : US, $27600; Japan, $ $21400 : Saudi Arabia, $ 10,100

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

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

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

Llad Phillips57

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

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

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

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

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

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

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

Llad Phillips65 Policy Issue n Minimum Wage

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

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

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

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

Llad Phillips70 Appendix

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

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

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

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

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

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

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

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

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

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

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

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