llad phillips 1 introduction to economics microeconomicsmonopoly the world economy
TRANSCRIPT
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Introduction to Economics
MicroeconomicsMicroeconomics
Monopoly Monopoly
The World EconomyThe World Economy
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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
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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
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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
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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
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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
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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.
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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."
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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
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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
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Autarchy-continued
West of the AlleghaniesWest of the Alleghanies– opened up to trade by Erie canalopened up to trade by Erie canal
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Erie CanalErie CanalCompletedCompletedin 1825in 1825
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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
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Agriculture
Manufactures
Isolated WestProduction Possibility Frontier, PPF
Regional Tastes:manufactures arescarce and hard tomake, i.e. valuable
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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
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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
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Beavers
Minks
1
2
1
slope: ∆B/∆M = 2 = PM/PB = MCM/MCB
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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
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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
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Agriculture
Manufactures
West Trades with the EastProduction Possibility Frontier, PPF
Regional Tastes:
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
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Agriculture
Manufactures
Trade Allows the West to Specialize in Agriculture
Production Possibility Frontier, PPF
Regional Tastes:
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
A
BSpecializein Ag at B
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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
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Agriculture
Manufactures
Trade Allows the West to Decouple Production & Consumption
Production Possibility Frontier, PPF
Regional Tastes:
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
A
BC
QMf
QAg
CMf
CAg
Exports
Imports
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SpecializationSpecialization
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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
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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
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Agriculture
Manufactures
Whose Ox Gets Gored? Western Manufacturers Lose Jobs
Production Possibility Frontier, PPF
Regional Tastes:
steep slope, ∆Ag/∆Mf = PMf/PAg , so manufactures are dear
Eastern Prices: ∆Ag/∆Mf = PMf/PAg
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Single Commodity Dependent EconomiesSingle Commodity Dependent Economies
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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
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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
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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