Llad Phillips 1 Introduction to Economics MicroeconomicsMonopoly The World Economy

Llad PhillipsLlad Phillips 11

Introduction to Economics

MicroeconomicsMicroeconomics

Monopoly Monopoly

The World EconomyThe World Economy


Econ 109 Llad Phillips 11/19/98Example 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.

APLMPL

Number of Workers

Output


The Brief for Microsoft The case for monopoly: Joseph SchumpeterThe case for monopoly: Joseph Schumpeter Growth is the key to social welfareGrowth is the key to social welfare Large and growing firms reinvest profits in Large and growing firms reinvest profits in

future growthfuture growth– capital deepeningcapital deepening

Large and growing firms have the resources Large and growing firms have the resources to invest in research and developmentto invest in research and development– technological change improves productivity technological change improves productivity


The Brief for Microsoft

Consumers have not been hurt by MicrosoftConsumers have not been hurt by Microsoft In contrast, consumers have benefitedIn contrast, consumers have benefited Any market power Microsoft has is tenuous Any market power Microsoft has is tenuous

in the rapidly growing and changing in the rapidly growing and changing software industrysoftware industry


Microsoft Trial

Against MicrosoftAgainst Microsoft– predatory behavior predatory behavior

towards towards competitorscompetitors

– acting in restraint of acting in restraint of competitioncompetition

For MicrosoftFor Microsoft– may have hurt may have hurt

competitors but not competitors but not “competition”“competition”

– consumers have consumers have benefited because benefited because of Microsoft and of Microsoft and have certainly not have certainly not been hurtbeen hurt


Microsoft Trial Slate MagazineSlate Magazine

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


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.


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 anddull, 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."


Outline: Lecture Fourteen-Trade The Western Movement: Manifest DestinyThe Western Movement: Manifest Destiny

– AutarchyAutarchy self-sufficiencyself-sufficiency

– The Advantages of ExchangeThe Advantages of Exchange specializationspecialization

The Political Economy of TradeThe Political Economy of Trade– Arguments for Free TradeArguments for Free Trade– Arguments Against Free TradeArguments Against Free Trade


Autarchy Self-Sufficient EconomySelf-Sufficient Economy

– only trade within a regiononly trade within a region– Sioux, Pawnees Sioux, Pawnees etc. etc. were self-sufficientwere self-sufficient

hunted and gathered their foodhunted and gathered their food roamed the land and moved their homesroamed the land and moved their homes made their clothesmade their clothes

– early settlers were self-sufficient: home early settlers were self-sufficient: home production production grew their foodgrew their food cleared the land and built their homescleared the land and built their homes made their clothesmade their clothes


Autarchy-continued

West of the AlleghaniesWest of the Alleghanies– opened up to trade by Erie canalopened up to trade by Erie canal


Erie CanalErie CanalCompletedCompletedin 1825in 1825




Labor for Manufactures

Labor for Agriculture

450

Agriculture

Manufactures

LaborConstraint

ProductionFunction withdiminishing returns

Production Functionwith diminishing returns

Production Functions, Labor Constraints and the Production Possibility Frontier: Land is a Fixed Factor; Diminishing Returns

Production Possibility Frontier

relative price of agriculturalgoods to manufactured goodsdepends on demand as well as supply

Source: Lecture Eleven


Agriculture

Manufactures

Isolated WestProduction Possibility Frontier, PPF

Regional Tastes:manufactures arescarce and hard tomake, i.e. valuable


The Slope of the Production Possibility Frontier

Recall: the slope of the production Recall: the slope of the production possibility frontier reveals relative possibility frontier reveals relative valuesvalues– rate of exchange: 2 beaver pelts for every rate of exchange: 2 beaver pelts for every

mink peltmink pelt ifif beaver pelts sell for 1 dollar, beaver pelts sell for 1 dollar, thenthen mink mink

pelts are worth 2 dollarspelts are worth 2 dollars


Mink Days

3

6

Beaver Days

36

450

1

2

1 2

Beavers

Minks

LaborConstraint

ProductionFunction

Production Function

Production Functions, Labor Constraints and the Production Possibility Frontier: No Fixed Factor

Production Possibility FrontierOne mink is worth, or trades for, two beavers: prices aredetermined by labor inputs

source: Lecture Eleven


Beavers

Minks

1

2

1

slope: ∆B/∆M = 2 = PM/PB = MCM/MCB


Agriculture

Manufactures

Isolated West

Production Possibility Frontier, PPF

Regional Tastes:manufactures arescarce and hard tomake, i.e. valuable

steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear

QMf

QAg


Trade for a Small Region The West takes Eastern trade prices as givenThe West takes Eastern trade prices as given

– after canals open up transportation and goods after canals open up transportation and goods are exchangedare exchanged

In the East, manufactures are more plentiful In the East, manufactures are more plentiful and agricultural goods are scarcerand agricultural goods are scarcer– ∆∆Ag/∆Mf Ag/∆Mf = P= PMfMf/P/PAgAg , is less steep, i.e in the East, , is less steep, i.e in the East,

manufactures are less expensive relative to manufactures are less expensive relative to agricultural goodsagricultural goods the East has a comparative advantage in the East has a comparative advantage in

manufactures and the West has a comparative manufactures and the West has a comparative advantage in agricultureadvantage in agriculture


Agriculture

Manufactures

West Trades with the EastProduction Possibility Frontier, PPF

Regional Tastes:


Eastern Prices: ∆Ag/∆Mf = PMf/PAg


Agriculture

Manufactures

Trade Allows the West to Specialize in Agriculture


Regional Tastes:



A

BSpecializein Ag at B


Trade Permits the Decoupling of Consumption from Production In the self-sufficient West, people had to In the self-sufficient West, people had to

produce what they consumed. produce what they consumed. When trade opened up with the East, the When trade opened up with the East, the

West could specialize in producing West could specialize in producing agricultural goods and import, i.e. trade for agricultural goods and import, i.e. trade for manufacturesmanufactures


Agriculture

Manufactures

Trade Allows the West to Decouple Production & Consumption


Regional Tastes:


A

BC

QMf

QAg

CMf

CAg

Exports

Imports


SpecializationSpecialization


Retrospective West better off with trade than with West better off with trade than with

autarchyautarchy– with trade it consumes more of agricultural and with trade it consumes more of agricultural and

manufactured goodsmanufactured goods because of advantages of specializationbecause of advantages of specialization

We don’t question the benefits of exchange We don’t question the benefits of exchange within nations, only betweeen nationswithin nations, only betweeen nations– trade is not an economic problem, quite the trade is not an economic problem, quite the

contrary it is an economic benefitcontrary it is an economic benefit– trade may be posed as a perceived trade may be posed as a perceived politicalpolitical

problem, reflecting nationalism and jingoistic problem, reflecting nationalism and jingoistic attitudes attitudes


International Trade: Pro & Con

Can’t compete with Can’t compete with low wages abroadlow wages abroad

jobs are lost abroadjobs are lost abroad need to protect infant need to protect infant

industriesindustries need to protect need to protect

strategic industriesstrategic industries excessive excessive

specializationspecialization unfair competitionunfair competition

Consumers gain from Consumers gain from more goodsmore goods

competition keeps competition keeps industry progressiveindustry progressive

ConCon ProPro


Agriculture

Manufactures

Whose Ox Gets Gored? Western Manufacturers Lose Jobs


Regional Tastes:




Single Commodity Dependent EconomiesSingle Commodity Dependent Economies


Labor Costs Recall: demand for labor: real wage equals Recall: demand for labor: real wage equals

marginal product of labormarginal product of labor– i.e.: w/pi.e.: w/pQ Q = MPL= MPL

– or por pQ Q = w/MPL= w/MPL = w/(∆Q/∆L)=w∆L/∆Q =MC= w/(∆Q/∆L)=w∆L/∆Q =MC

wage wage relativerelative to labor productivity that to labor productivity that counts in determining the marginal cost of counts in determining the marginal cost of productionproduction

Unit labor costs: wage bill per unit of outputUnit labor costs: wage bill per unit of output– average: wL/Q = w/APLaverage: wL/Q = w/APL– margin: w/MPLmargin: w/MPL




Adam SmithAdam SmithThe Wealth of Nations (1776)The Wealth of Nations (1776)• • opposes mercantilism: state protectionismopposes mercantilism: state protectionism through quotas and tariffsthrough quotas and tariffs• • advocates specialization, division of laboradvocates specialization, division of labor• • benefits of competition: invisible handbenefits of competition: invisible hand

David RicardoDavid RicardoThe Principles of Political Economy and TaxationThe Principles of Political Economy and Taxation(1817)(1817)•• The Law of Comparative AdvantageThe Law of Comparative Advantage• • The Law of Diminishing ReturnsThe Law of Diminishing Returns










Summary-Vocabulary-Concepts autarchy/self-sufficiencyautarchy/self-sufficiency production possibility production possibility

frontierfrontier exchange of goodsexchange of goods comparative advantagecomparative advantage specializationspecialization export export importimport infant industryinfant industry strategic industrystrategic industry unfair competitionunfair competition

single commodity economysingle commodity economy unit labor costunit labor cost mercantilismmercantilism division of labordivision of labor invisible handinvisible hand law of comparative advantagelaw of comparative advantage Adam SmithAdam Smith David RicardoDavid Ricardo regionalizationregionalization European UnionEuropean Union China: special economic zonesChina: special economic zones market sizemarket size

Documents

Llad Phillips 1 Introduction to Economics MicroeconomicsMonopoly The World Economy