Introduction to Economics
Microeconomics
The US Economy
Llad Phillips
1
Outline: Lecture Eleven

Application of the Marginal Product of
Labor
 the
demand for labor
 the
firm
 the market
Marxism
 The Wealth of Nations

Llad Phillips
2
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
APL, average product of labor
w/p
MPL, marginal product
of labor
L
Llad Phillips
Man-Days on Tomato Farm
3
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
Llad Phillips
4
Output, Q
Bushels of
Tomatoes
Production Function
Real Total Costs
Total
Product Curve
Real Wage Bill, L*w/ pQ
Fixed Costs, FC/ pQ
Input, L
number of worker-days
Llad Phillips
5
Real Total Costs
Bushels of
Tomatoes
Profit
Total
Product Curve
break even
output
break even input
Loss
Profit
Qmax
0
Loss
Llad Phillips
Input, L number of worker-days
Lmax
profits are maximum where slope of the total product
curve equals slope of total real costs
6
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
APL, average product of labor
w/p
MPL, marginal product
of labor
L
Llad Phillips
Man-Days on Tomato Farm
7
What Determines the Real Wage?
The Labor Market
Demand for Labor on Tomato Farms in the Region
MPL Farm A
MPL,
w/p
LA
Llad Phillips
MPL Farm B
a
LB
LA + LB
Man-Days
8
Demand for Labor on Tomato Farms in the Region
MPL,
w/p
MPL Farm A
LA
Llad Phillips
MPL Farm B
a
Market Demand
b for Labor
LB
LA + LB
Man-Days
9
Market Demand for Labor on Tomato Farms in the
Region;
Market Supply of Labor for Tomato Farms in the Region
Market Clearing Wage
MPL, Market
w/p Real
Wage
Market Demand for Labor
D
Market Supply of Labor
S
S
D
Man-Days
Llad Phillips
10
Individual Farm Worker’s Supply of Labor
Earnings
Source: Lecture Three
low value
$240
$90
for 9 hrs
of work
high
Optimum
high value
Leisure
(learning)
$0
0 hours
15 hours
of leisure
24 hours
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
Llad Phillips
12
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
Llad Phillips
13
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
Llad Phillips
14
Market Demand for Labor on Tomato Farms in the
Region;
Market Supply of Labor for Tomato Farms in the Region
MPL,
Market Supply of Labor
unemployed
w/p
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
Llad Phillips
15
1836
Llad Phillips
Karl
Marx
1861
16
Marx’s Dwelling:
28 Dean Street
Soho, London
Llad Phillips
17
Icon of the 60’s
Llad Phillips
18
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
19
displaced labor: reserve army of unemployed
Llad Phillips

Karl Marx’s Capitalism
Labor
Capital displaces labor
Output
Capital Stock
Technology is Labor Saving
Llad Phillips
20
Karl Marx’s Capitalism
Labor
Capital displaces labor
Output
Capital Stock
Technology is Labor Saving
Llad Phillips
21
APL, MPL
APL
MPL
Demand for
Labor
Subsistence
Real Wage
Supply of Labor
Reserve Army of
the Unemployed
Labor Input
Llad Phillips
22
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
Llad Phillips
23
Exploitation of Labor: APL - MPL
APL, MPL
APL
MPL
Demand for
Labor
APL - MPL =
/p)/L
Subsistence
Real Wage
Supply of Labor
Reserve Army of
the Unemployed
Labor Input
L
# Employed Workers
Llad Phillips
24
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
Llad Phillips
25
APL,
MPL
APL
MPL
Demand for
Labor
Subsistence
Real Wage
Supply of Labor
Real Wage Bill =
Subsistence Wage*L
APL - MPL =
/p)/L
S
Reserve Army of
the Unemployed
Labor Input
L
# Employed Workers
Llad Phillips
26
APL,
MPL
D
APL
Total Real Value
of Output =
APL*L = Q = (Q/L)*L
Subsistence
Real Wage
S
APL - MPL =
/p)/L
S
Reserve Army of
D the Unemployed
Labor Input
L
# Employed Workers
Llad Phillips
27
APL,
MPL
D
Total Real Value
of Output =
APL*L = Q = (Q/L)*L
Subsistence
Real Wage
S
Real Wage Bill
APL
APL - MPL =
/p)/L
S
Reserve Army of
D the Unemployed
Labor Input
L
# Employed Workers
Llad Phillips
28
Capitalist Exploitation of Workers: Class Conflict
APL,
MPL
D
Capitalists’ Real Profit
Subsistence
Real Wage
S
APL
APL - MPL =
/p)/L
S
Reserve Army of
D the Unemployed
Labor Input
L
# Employed Workers
Llad Phillips
29
Class Conflict
 Karl
Marx
class
conflict is economic conflict
 capitalists
 Thomas
class
Malthus & David Ricardo
conflict is economic conflict
 landlords
Llad Phillips
versus workers
versus workers
30
Malthusian Model
Average,
Marginal
Product
APL MPL =
Real Rent
Per Worker
Llad Phillips
Exploitation of Poor Workers by the
Landed Aristocracy
APL
MPL
Real Wage Bill
Sustainable #
of workers
Subsistence Wage
Input, # of workers
31
Malthusian Model
Average,
Marginal
Product
APL MPL =
Real Rent
Per Worker
Llad Phillips
Exploitation of Poor Workers by the
Landed Aristocracy
Rent to the
Landlords
APL
MPL
Real Wage Bill
Sustainable #
of workers
Subsistence Wage
Input, # of workers
32
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,
Llad Phillips
church, & landowners
33
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
Llad Phillips
34
sector
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
Llad Phillips
35
Production Functions, Labor Constraints and
the Production Possibility Frontier: No Fixed Factor
Minks
Beavers
Production
2
2
Function
Production
Function
1
1
Days
6
3
3
6
Days
Beaver Days
6
Labor Constraint
3
450
Llad Phillips
3
6
Mink Days
36
Production Functions, Labor Constraints and
the Production Possibility Frontier: No Fixed Factor
Beavers
Production
Function
2
1
Beaver Days
6
Minks
3
1
450
Labor
Constraint
2
3
6
Production Function
Mink Days
Llad Phillips
37
Production Functions, Labor Constraints and
the Production Possibility Frontier: No Fixed Factor
Beavers
Production
Function
Production Possibility Frontier
One mink is worth, or trades
for, two beavers: prices are
determined by labor inputs
2
1
Beaver Days
6
Labor
Constraint
Minks
3
1
450
2
3
6
Production Function
Mink Days
Llad Phillips
38
Production Functions, Labor Constraints and the Production
Possibility Frontier: Land is a Fixed Factor; Diminishing Returns
Agriculture
Production
Function with
diminishing
returns
Production Possibility Frontier
relative price of agricultural
goods to manufactured goods
depends on demand as well
as supply
Labor for
Agriculture
Manufactures
Labor
Constraint
450
Production Function
with diminishing returns
Labor for Manufactures
Llad Phillips
39
National Income 1996
Corporate Profits
Rental Income11%
Net Interest
7%
2%
Proprietor's Income
9%
Employee
Compensation
71%
source: Lecture Six
Gross National Product Per Capita in 1929 $ .
1400
1200
1000
$
800
600
400
200
1950
1946
1942
1938
1934
1930
1926
1922
1918
1914
1910
1906
1902
1898
1894
1890
1886
1882
1878
1874
0
Date
Llad Phillips
41
Retrospective

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
Llad Phillips
42
What Accounts for Economic Growth?
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

Llad Phillips
43
1995 GDP per Capita in US $
: Brazil, $6100; Mexico, $7700
: India, $1500; China, $2900; Egypt, $2800
: Zaire, $400; Madagascar, $820; Cuba, $1300
: US, $27600; Japan, $ $21400
: Saudi Arabia, $ 10,100
Source: http://www.odci.gov/cia/publications/pubs.html
Llad Phillips
44
Source: CIA
Llad Phillips
45
Aggregate Production Function,showing the effect
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, Long Term Economic Growth(1966)
Gross National Product in 1929 $ .
250000
200000
100000
50000
1950
1946
1942
1938
1934
1930
1926
1922
1918
1914
1910
1906
1902
1898
1894
1890
1886
1882
1878
0
1874
Millions
150000
Year
Llad Phillips
47
Growth of Real Gross National Product
SPAN
1890-1907
1907-1929
1929-1965
GROWTH RATE
4.50%
2.70%
3.90%
source: US Department of Commerce, Long Term Economic
Growth(1966)
Llad Phillips
48
Gross Domestic Product in 1929 $
.
Millions
1000000
100000
10000
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
Year
Llad Phillips
49
Summary-Vocabulary-Concepts









Karl Marx
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
Llad Phillips








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 profits50