Introduction to Economics Microeconomics The US Economy Llad Phillips 1 Fall 2002 Median 47 Max 72 Midterm Scores 7064 69 58 63 52 57 47 52 41 46 35 40 28 34 19 27 18 Grade A A AB B BC C CD Number 1 2 9 25 27 27 13 10 7 6 Fall 2001 Midterm Scores 7366 72 60 65 54 59 48 53 42 47 36 40 30 35 24 29 23 Grade A A AB B BC C CD Number 1 10 15 15 33 21 21 13 4 1 Outline Lecture Thirteen The Free Market Story The Wealth of Nations Llad Phillips 4 Why Has the Market Economy Economic System Prevailed It has taken about 130 years but it seems socialism and communism not to mention fascism have fallen by the wayside Why What are the strengths of market systems Are there weaknesses Llad Phillips 5 Returns to Scale and Economic Efficiency Constant returns to scale if you double inputs then you double output so output per worker average product and marginal product would be constant total cost of the factor inputs would increase proportionally with output so average cost per unit of output and marginal cost per unit of output would be constant a given constant average cost firm could expand or new firms could enter and produce Llad Phillips 6 A Free Market Economy Assumes Resources Are Mobile New firms can enter or leave an industry Existing firms can expand or contract Llad Phillips 7 Assuming Constant Returns to Scale for Simplicity The supply curve of the firm is its marginal cost curve constant under constant returns to scale The supply curve of the industry is the same the marginal cost curve Llad Phillips 8 Supply Curve of the Firm Cost per Unit of Output Supply Curve of the Firm Average cost marginal Cost QCOMP Llad Phillips 9 Supply Curve of the Industry Cost per Unit of Output Supply Curve of the Industry Average cost marginal Cost QCOMP Llad Phillips 10 Add Market Demand to the Picture Market Demand Average cost marginal Cost PM Market Supply QCOMP Llad Phillips 11 Consumers Benefit Consumers pay a market price for output equal to the marginal cost of resources used in production So resources are allocated efficiently Consumers also reap a benefit consumer surplus Llad Phillips 12 Consumer Surplus The first consumer that enters the market is willing to pay a high price The next consumer is willing to pay a little lower The last consumer that enters at the market price is just willing tp pay that price The consumers that are willing to pay a higher price but only have to pay the market price benefit Llad Phillips 13 Price the P1 Market Demand first consumer Surplus to the first consumer P1 PM is willing to pay PM Market Supply QCOMP Llad Phillips 14 Total Consumer Surplus A Measure of Consumer Welfare Market Demand Consumer Surplus PM QCOMP Llad Phillips 15 Summary of the Free Market Story Efficient use of resources resources flow to produce what consumers want consumers pay a market price equal to the marginal cost of resources to produce a unit of output the surplus is surplus that goes to consumers Llad Phillips 16 What Can Go Wrong Monopoly the concentration of economic power The role of international trade free trade can break down monopoly power in a given nation and promote competition and hence efficiency Llad Phillips 17 Santa Barbara News Press Saturday Nov 10 2001 Llad Phillips 18 Outline The Wealth of Nations Sources of Growth Can the US sustain Prosperity Competitition Llad Phillips 19 The Wealth of Nations 1776 Adam Smith Smith first raised the question what causes a country to prosper Why is the USA so prosperous Growth of population and labor force accumulation of capital machines buildings and tools technological improvements and inventions How important is each contribution Llad Phillips 20 Chapter 23 Figure 23 3 Percentage Contribution to Real GDP Growth Llad Phillips 21 Input Output Schematic Labor Capital Output Technology Llad Phillips 22 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 Capital per worker C increases and output per worker increases with capital accumulation L1 Input Labor L Source Lecture Six National Accounting Sources of Growth Capital deepening technological change and increased productivity social infrastructure competitive markets and trade Llad Phillips 24 Capital Deepening capital per worker increases so output per worker increases Llad Phillips 25 Output Per Worker Has Been Growing As measured by real GDP per capita As measured by output per manhour Llad Phillips 26 Gross National Product Per Capita in 1929 1400 1200 1000 800 600 400 200 Date Llad Phillips 27 1950 1946 1942 1938 1934 1930 1926 1922 1918 1914 1910 1906 1902 1898 1894 1890 1886 1882 1878 1874 0 Output per Manhour Index 100 in 1929 250 150 100 50 Year Llad Phillips 28 1954 1949 1944 1939 1934 1929 1924 1919 1914 1909 1904 1899 1894 1889 1884 1879 0 1874 Index 200 Aggregate Production Function As capital per worker increases output per worker increases And the marginal product per worker increases Q f L K2 Output Q Value Added Q f L K1 C L1 Input Labor L Output per Worker Average Marginal Product Things Improve with capital deepening Output per worker increase shifting APL Labor Supply1874 Labor Supply1954 Real Wage1954 MPL1874 APL Real Wage1874 MPL1954 L1874 Llad Phillips L1954 Input of workers 30 An increase in capital increases the marginal product of labor Llad Phillips Chapter 23 Figure 23 2 31 Output per Manhour Index 100 in 1929 250 150 100 50 Year Llad Phillips 32 1954 1949 1944 1939 1934 1929 1924 1919 1914 1909 1904 1899 1894 1889 1884 1879 0 1874 Index 200 U S Annual Productivity Growth Years 1959 1968 1968 1973 1973 1980 1980 1986 1986 1994 1994 2000 Annual Growth Rate 3 5 2 5 1 2 2 1 1 4 2 5 Source Text Ch 23 Table 23 3 Llad Phillips 33 Los Angeles Times Thursday Nov 8 2001 Llad Phillips 34 Total Factor Productivity Index 1920 1957 1929 100 200 Total Factor Productivity Exponential Trend 180 160 120 100 0 022x y 78 386e 2 R 0 9599 80 60 40 20 1956 1953 1950 1947 1944 1941 1938 1935 1932 1929 1926 1923 0 1920 Index 140 Year Llad Phillips 35 Indices of Labor Input and Capital Input 1929 100 160 140 Labor Input Index Capital Input Index 100 80 60 40 20 1954 1949 1944 1939 1934 1929 1924 1919 1914 1909 1904 1899 1894 1889 1884 1879 0 1874 Index 120 Year Llad Phillips 36 Total Factor Productivity About the Same for Every Measure Years Quantity Growth Rate 1920 1953 GNP 29 0 0326 1920 1957 Total Input Index Difference or Residual 1920 1957 Total Factor Productivity 1920 1957 Output Per
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