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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

Introduction to Economics

Microeconomics

The US Economy


Outline lecture eleven
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

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


Profit maximizing demand for labor
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


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


Profit

Qmax

0

Lmax

Loss

profits are maximum where slope of the total product

curve equals slope of total real costs


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


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


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


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


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


Suppose someone wants to improve the lot of farmworkers
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


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


Improving the lot of farmworkers
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


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


1836

Karl

Marx

1861


Marx’s Dwelling:

28 Dean Street

Soho, London



Karl marx
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


Karl Marx’s Capitalism

Labor

Capital displaces labor

Output

Capital Stock

Technology is Labor Saving


Karl Marx’s Capitalism

Labor

Capital displaces labor

Output

Capital Stock

Technology is Labor Saving


APL, MPL

APL

MPL

Demand for

Labor

Subsistence

Real Wage

Reserve Army of

the Unemployed

Supply of Labor

Labor Input


Karl marx1
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


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


Marx exploitation of working class
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


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


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


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


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


Class conflict
Class Conflict

  • Karl Marx

    • class conflict is economic conflict

      • capitalists versus workers

  • Thomas Malthus & David Ricardo

    • class conflict is economic conflict

      • landlords versus workers


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


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


Land ownership power
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


Stages of economic growth scarcity
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


Labor theory of value
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


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


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


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


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 Six Possibility Frontier: Land is a Fixed Factor; Diminishing Returns


Retrospective
Retrospective Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

  • 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


What accounts for economic growth
What Accounts for Economic Growth? Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

  • 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


1995 GDP per Capita in US $ Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

: 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


Source: CIA Possibility Frontier: Land is a Fixed Factor; Diminishing Returns


Aggregate Production Function,showing the effect Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

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


source: US Department of Commerce, Possibility Frontier: Land is a Fixed Factor; Diminishing ReturnsLong Term Economic Growth(1966)


Growth of Real Gross National Product Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

GROWTH RATE

SPAN

source: US Department of Commerce, Long Term Economic

Growth(1966)


Summary vocabulary concepts

Karl Marx Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

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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