Llad Phillips1 Introduction to Economics Microecomomics The US Economy

Llad Phillips 1

Introduction to EconomicsIntroduction to Economics

MicroecomomicsMicroecomomics

The US EconomyThe US Economy

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Lecture ElevenLecture Eleven

The enduring questions in economicsThe enduring questions in economics The population explosion and Malthusian The population explosion and Malthusian

economicseconomics The economics of colonialism and The economics of colonialism and

exploitationexploitation Karl Marx and economic thoughtKarl Marx and economic thought

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Why Do Civilizations Rise and Fall?Why Do Civilizations Rise and Fall? Where does the wealth and power of nation Where does the wealth and power of nation

states come from?states come from? Is growth a good or bad thing or a mixed Is growth a good or bad thing or a mixed

bag?bag? Are energy resources going to run out or Are energy resources going to run out or

will technological change save the day?will technological change save the day? Will population growth doom the planet? Will population growth doom the planet?

Course GradingCourse Grading

Quiz 40Midterm 80Final 169Course 289

If you complete over 70 % of both the text Problems and Lab Exercises, then your course grade is increased by 1/3 grade point

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Part I: GrowthPart I: Growth

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Is Globalization and Growth a Good Thing?

Is Globalization and Growth a Good Thing?

World Trade OrganizationWorld Trade Organization China wants in, gets in September 2001China wants in, gets in September 2001 protestors at Seattle, Washington D. C.protestors at Seattle, Washington D. C.

Multinational CorporationsMultinational Corporations Sweatshops for women and childrenSweatshops for women and children

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Is Globalization & Growth Good?Is Globalization & Growth Good?

Trade benefits both Trade benefits both partiesparties

Growth leads to higher Growth leads to higher income per capitaincome per capita

Higher GDP per capita Higher GDP per capita countries have more countries have more equitable distributions equitable distributions of incomeof income

Aren’t single Aren’t single commodity countries commodity countries vulnerablevulnerable

Isn’t growth Isn’t growth exhausting the worlds exhausting the worlds resources and resources and polluting the oceans?polluting the oceans?

For Against

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Protesting GlobalizationProtesting Globalization

Event Date Organization # ofProtestors

Seattle 12/99 WTO 50,000

Washington 4/00 World Bank-IMF

10,000

Quebec 4/01 Summit oftheAmericas

30,000

Genoa 7/01 G-8 150,000

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The Pro-Growth ArgumentThe Pro-Growth Argument

Growth lifts all boatsGrowth lifts all boats Low income economies grow faster and catch Low income economies grow faster and catch

up: convergenceup: convergence

Llad Phillips 10Text: Chapter 23, Figure 23.1

Are Low GDP Countries Catching Up: Convergence

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Trade Stimulates GrowthTrade Stimulates Growth Example; Smoot-Hawley bill duing the great Example; Smoot-Hawley bill duing the great

depression raised tariffs; a “beggar-your-depression raised tariffs; a “beggar-your-neighbor” policy that led to retaliationneighbor” policy that led to retaliation

Example: coastal provences of China trade with Example: coastal provences of China trade with the world and stimulate industrythe world and stimulate industry

Example: Renaissance- the City states of Italy, Example: Renaissance- the City states of Italy, e.g. Venice prosper and support the artse.g. Venice prosper and support the arts

Example: Post-Elizabethan era- England and Example: Post-Elizabethan era- England and Holland prosper through trade Holland prosper through trade

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China: Special Economic Zones

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Growth levels the playing fieldGrowth levels the playing field Countries with a higher income per capita have Countries with a higher income per capita have

a more equal distribution of incomea more equal distribution of income

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The Anti-Growth, Anti-Trade Argument


Rich get richer and the poor get poorerRich get richer and the poor get poorer

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Share of World GDP

Handbook of International Economic Statistics, 1997

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Source: CIA

Llad Phillips 17Handbook of International Economic Statistics, 1997

Market Size by GDP

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Five Classes of GDP per Capita

$3001-$10000

$10100-$15000

$15001-

$1000-3000 - $1000

Llad Phillips 19Handbook of International Economic Statistics, 1997

Scale of World Trade Within and Between Major Regions

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The vulnerability of single-commodity The vulnerability of single-commodity countriescountries CoffeeCoffee oiloil

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Vulnerable Single Commodity Economies

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Growth destroys forests and pollutes oceansGrowth destroys forests and pollutes oceans

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Forestry Industry Imports as % of Imports


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Key Environmental Problem Areas

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Radiation Hotspots from Chornobyl Nuclear Accident

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CO2 Emissions per Capita

World Bank

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Does Anti-Globalization Have a Neo-Malthusian Basis?Does Anti-Globalization Have a Neo-Malthusian Basis? ScarcityScarcity

Malthus:Food Producing Land is scarce, a fixed Malthus:Food Producing Land is scarce, a fixed resourceresource

Anti-G’s: Forests and oceans are limitedAnti-G’s: Forests and oceans are limited Infinite Supply of LaborInfinite Supply of Labor

Malthus: Population expands if there is any Malthus: Population expands if there is any surplus and gobbles it upsurplus and gobbles it up

Anti-G’s: Population pressure is using up earth Anti-G’s: Population pressure is using up earth and this is accelerated by growth and tradeand this is accelerated by growth and trade

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Part II. Population GrowthPart II. Population Growth

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PopulationOver Time

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Population ClocksPopulation Clocks

http://www.census.http://www.census.govgov/population/www/index.html/population/www/index.html

http://www.census.http://www.census.govgov

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CA Population In MillionsCA Population In Millions

July ‘00 July ‘05 July ‘10 July ‘15 July ‘20

34.48 37.47 40.26 42.71 45.82

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Malthusian EconomicsMalthusian Economics

Combines a population model and a Combines a population model and a production modelproduction model

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Malthusian PredictionMalthusian Prediction Population would increase until it existed on Population would increase until it existed on

a subsistence wage: Poor can not be helpeda subsistence wage: Poor can not be helped Thomas Malthus, ParsonThomas Malthus, Parson

Essay on the Principle of Population(1798)Essay on the Principle of Population(1798) Combined Two IdeasCombined Two Ideas

Ben Franklin had noticed population in the Ben Franklin had noticed population in the colonies was growing exponentially, doubling colonies was growing exponentially, doubling every 25 yearsevery 25 years

David Ricardo argued that land was a fixed David Ricardo argued that land was a fixed resource in England so that more labor would resource in England so that more labor would yield more output, but at a diminishing rateyield more output, but at a diminishing rate

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Neo-Malthusian IdeasNeo-Malthusian Ideas ““Population Fatigue”Population Fatigue”

More people dyingMore people dying IndiaIndiaEthiopiaEthiopiaPakistanPakistanNigeriaNigeria

These countries are having trouble caring These countries are having trouble caring for increasing numbers of childrenfor increasing numbers of children falling water tables, deforestation, erosionfalling water tables, deforestation, erosion

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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. “

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,

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Adam Smith The Wealth of Nations(1776)

Adam Smith The Wealth of Nations(1776)

Competing idea: Competing idea: Limited ResourcesLimited Resources Thomas Malthus: productive land is limited and Thomas Malthus: productive land is limited and

population exhausts any surpluspopulation exhausts any surplus underdeveloped countries underdeveloped countries Green movementGreen movement

Competing idea: Competing idea: Growing ResourcesGrowing Resources Creates a Creates a SurplusSurplus Capital accumulation: increased capital per worker Capital accumulation: increased capital per worker

increases output per worker and wagesincreases output per worker and wages Karl Marx: the capitalists will siphon off the surplusKarl Marx: the capitalists will siphon off the surplus

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Outline: Lecture ElevenOutline: Lecture Eleven

Malthus, RicardoMalthus, Ricardo the Law of Diminishing Returnsthe Law of Diminishing Returns

ProductionProduction Input-Output RelationshipsInput-Output Relationships Guidelines for Managing Production Guidelines for Managing Production

International Society of Malthus; link Ch.2 http://www.igc.org/desip/malthus/index.html

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Why do some countries prosper, and others do not?Why do some countries prosper, and others do not?

Ch. 22 “Classical Economics: the Economy Ch. 22 “Classical Economics: the Economy at Full Employment”at Full Employment”

Ch. 23 “Why Do Economies Grow?Ch. 23 “Why Do Economies Grow? Ch. 8 “Production and Cost”Ch. 8 “Production and Cost”

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Population

Production of Income

Malthusian Growth Model: Some Resources are Limited

if labor earns more than subsistence wagethen population increases

because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

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Law of Diminishing ReturnsLaw of Diminishing Returns

One or More Inputs FixedOne or More Inputs Fixed Variation of Total Product with Variable Variation of Total Product with Variable

InputInput Example:Example:

output: amount learnedoutput: amount learned variable input: hours spent studyingvariable input: hours spent studying fixed input: human condition, attention spanfixed input: human condition, attention span

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Law of Diminishing ReturnsLaw of Diminishing Returns

Agricultural ExampleAgricultural Example output: bushels of tomatoesoutput: bushels of tomatoes fixed input: 1/8 acre of landfixed input: 1/8 acre of land variable input: number of workers tending variable input: number of workers tending

tomatoestomatoes

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Output

Input

Bushels of Tomatoes

number of workers

Production FunctionTotalProduct Curve

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PerspectivePerspective

Total OutputTotal Output Total WagesTotal Wages Total Surplus Total Surplus

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Output

Input

Food

number of workers

Production Function for the Malthus Society

TotalProduct Curve

Subsistence Wages =Subsistence Wage*# of Workers

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Output

Input

Food

number of workers

Production Function for the Malthus Society

TotalProduct Curve

Subsistence Wages =Subsistence Wage*# of Workers

Surplus to Landowners

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Malthusian StoryMalthusian Story

What if wages to peasants exceeds the What if wages to peasants exceeds the subsistence level of wages?subsistence level of wages? surplussurplus

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Output

Input

Food

number of workers

Production Function

TotalProduct Curve

Subsistence Wages

Peasant Surplus

PeasantWages

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Malthusian StoryMalthusian Story

If peasants have a surplus, more of them If peasants have a surplus, more of them marry, form families, have children, and marry, form families, have children, and consume the surplusconsume the surplus

Population increases and the number of Population increases and the number of workers increasesworkers increases

Output increases, but less than Output increases, but less than proportionallyproportionally

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Output

Input

Food

number of workers

Production Function

TotalProduct Curve

Subsistence Wages

Peasant Surplus

PeasantWages

population (worker) increase

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Output

Input

Food

number of workers

Production Function

TotalProduct Curve

Subsistence Wages

Peasant Surplus

PeasantWages

population (worker) increase

maximumpopulation

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Malthusian WorldMalthusian World Thomas CarlyleThomas Carlyle

economics is the “dismal science”economics is the “dismal science” Thomas Hobbes, Thomas Hobbes, Leviathan(1651)Leviathan(1651)

[In nature there is] continual fear, and danger of [In nature there is] continual fear, and danger of violent death; and the life of man, solitary, violent death; and the life of man, solitary, poor, nasty, brutish, and short.poor, nasty, brutish, and short.

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Population

Production of Income

Malthusian Growth Model: Some Resources are Limited

if labor earns more than subsistence wagethen population increases

because of the law of diminishing returns, if population increases, then the wage falls back to subsistence

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PoliticsPolitics

Who gets the rest of the output?Who gets the rest of the output? landowners (landed aristocracy)landowners (landed aristocracy)

basis of feudal societybasis of feudal societybasis of colonial countriesbasis of colonial countries

Social tension between socio-economic Social tension between socio-economic classesclasses

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Output

Input

Food

number of workers

Production Function

TotalProduct Curve

Subsistence Wages

Peasant Surplus

PeasantWages

Rent to the Landowners

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New WorldNew World

Lots of landLots of land land grants from royals in England and Spainland grants from royals in England and Spain

Labor is scarceLabor is scarce in many cases, colonists kill off the nativesin many cases, colonists kill off the natives

What should a poor landowner do?What should a poor landowner do?

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Average ProductAverage Product food per workerfood per worker

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Output

Input

Bushels ofTomatoes

number of workers

A

10 bushels

5 workers

tan = 10 bushels/ 5 workers = 2 bushels per worker

TotalProduct Curve

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Output

Input

Bushels ofTomatoes

number of workers

A

10 bushels

5 workers

tan = 10 bushels/ 5 workers = 2 bushels per worker

B

tan = 12 bushels/ 8 workers = 1.5 bushels per worker

8 workers

12 bushels

Total ProductCurve

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Output,Total Product

Input

Bushels of Tomatoes

number of workers

A

10 bushels

5 workers

B

8 workers

12 bushels

Average Product

ABushels ofTomatoes Per Worker 2

1.5B

5 workers8 workers

Input, # of workers

Total Product Curve

Average Product Curve

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Where Should You Produce?Where Should You Produce?

At point B, 8 workers, where total output is At point B, 8 workers, where total output is maximum?maximum?

At point A, 5 workers, where average At point A, 5 workers, where average product is maximum?product is maximum?

How many consecutive hours should you How many consecutive hours should you study?study?

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Input

Bushels of Tomatoes

number of workers

A

10 bushels

5 workers

B

8 workers

12 bushels

Average Product


1.5B

5 workers8 workers

Input, # of workers

Total Product Curve


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Input

Bushels of Tomatoes

number of workers

A

10 bushels

5 workers

B

8 workers

12 bushels

Average Product


1.5B

5 workers8 workers

Input, # of workers

Total Product Curve


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Marginal ProductMarginal Product change in output for a unit change in inputchange in output for a unit change in input pay the marginal worker his/her contribution to pay the marginal worker his/her contribution to

outputoutput

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Output

Input

Bushels of Tomatoes

number of workers

Production Function

3 4

= 1 worker

9

3

= 6 tomatoes,bushels

Marginal Product equals6 bushels of tomatoes

TotalProduct Curve

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Output

Input

Tomatoes

number of workers

3 4

= 1 worker

9

3

= 6 tomatoes

Marginal Product equals6 tomatoes

Marginal Product

Bushels of TomatoesPer Worker

6

0

Total Product Curve

Marginal Product Curve

Point of Diminishing Returns

Input, # of Workers

Bushels of

bushels, bushels

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Input

Bushels of Tomatoes

number of workers

A

10 bushels

5 workers

B

8 workers

12 bushels

Average,Marginal Product

ABushels of Tomatoes Per Worker

2

1.5B

5 workers8 workers

Input, # of workers

Total Product Curve



0

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Operating Range For the FirmOperating Range For the Firm So, you only produce where marginal product is So, you only produce where marginal product is

less than average product: MP < AP less than average product: MP < AP Note: there is no point producing where MP is Note: there is no point producing where MP is

negative, you would be throwing away some negative, you would be throwing away some output, so produce where 0 < MP < AP output, so produce where 0 < MP < AP

Suppose marginal product exceeds average Suppose marginal product exceeds average product, MP > AP =Q/Lproduct, MP > AP =Q/L if labor is paid its marginal productif labor is paid its marginal product then w/ pthen w/ pQQ > Q/L > Q/L

and so wL > pand so wL > pQQ Q Q

i.e. variable costs exceed gross revenue, and i.e. variable costs exceed gross revenue, and you would not cover operating costsyou would not cover operating costs

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Average, Marginal Product

A

Bushels of Tomatoes Per Worker 2

1.5B

5 workers 8 workers

Input, # of workers



Operating Range of the Firm: A through B

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ImplicationImplication

Keep studying as long as the average Keep studying as long as the average amount learned per hour keeps amount learned per hour keeps increasingincreasing once the average amount learned per hour once the average amount learned per hour

starts decreasingstarts decreasing then consider taking a break then consider taking a break

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A

B

Input, # of workers



Malthusian Model

Subsistence Wage

Sustainable #of workers

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Input, # of workers

Malthusian Model: Biblical Feast and Famine

Subsistence Wage


APLMPLHigher Wage

Things Improve:Temporarily: (1) MPL increases, wage exceeds subsistence, population increases,(2) MPL falls back, excess population dies off: famine and pestilence

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Input, # of workers

Malthusian Model

Subsistence Wage


APLMPLHigher Wage

Things Improve:Permanently: MPL increases, wage exceeds subsistence, population increases,# of workers increases until MPL equalssubsistence wage, Net result: more people are miserable.

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http://www.worldwatch.org/

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Summary-Vocabulary-ConceptsSummary-Vocabulary-Concepts Thomas MalthusThomas Malthus David RicardoDavid Ricardo law of diminishing law of diminishing

returnsreturns variable inputvariable input fixed inputfixed input subsistence wagesubsistence wage Malthusian growth Malthusian growth

modelmodel total product curvetotal product curve average product of average product of

laborlabor

marginal product of marginal product of laborlabor

point of diminishing point of diminishing returnsreturns

real wagereal wage operating range for the operating range for the

firmfirm Thomas CarlyleThomas Carlyle Thomas HobbesThomas Hobbes

Documents

Llad Phillips1 Introduction to Economics Microecomomics The US Economy