Key Terms

Question 1

market price

Answer 1

short run price, determined by supply and demand. market price gravitates toward natural price

Question 2

natural price

Answer 2

long term price. market price gravitates toward it

Question 3

value in exchange

Answer 3

power of purchasing other goods

Question 4

value of a commodity

Answer 4

determined 3 ways:

1) labor embodied
2) labor commanded
3) value in exchange

Question 5

labor embodied

Answer 5

indirect and direct labor that enters into the production process

Question 6

labor commanded

Answer 6

the value of a good is measured by the quantity of “labor” it is able to command

Question 7

exchange value

Answer 7

the sum of costs and profit in a capitalist economy

Question 8

invisible hand

Answer 8

self-interested behavior, in a competitive economy, ensures that social wellbeing will be achieved

Question 9

wages fund theory

Answer 9

average annual wages = wages fund / # of workers

Question 10

wage structure (5 factors)

Answer 10

1) agreeableness of the occupation
2) cost of acquiring necessary skills and knowledge
3) regularity of employments
4) level of trust and responsibility
5) probability/improbability of success

Question 11

profits

Answer 11

because every investment is exposed to risk of loss, the lowest rate of profit must be high enough to compensate for such losses while still leaving a surplus for the entrepreneur

profit = determined by the rent of profit in the no-rent land

Question 12

rents

Answer 12

the price paid for the use of land. It is a residual

rent exists because capitalist farmers are competing with each other to get the most fertile land

Question 13

interest rates

Answer 13

education from profit; not a separate distributive share

Question 14

pin factory example

Answer 14

18 steps to make a pin; 1 worker can make 20 pins a day; 10 workers can make 48K pins in a day. shows that DOL leads to increased productivity which leads to greater economic growth

Question 15

dependencies

Answer 15

smith ignored these

1) market place dependencies - reduced everything to faceless transactions in the market place. he said that general opulence is divided among everyone, but for this to be possible there has to be some sort of dependency (which is not analyzed)
2) workers depend on each other
3) views invention as done by 1 worker

Question 16

virtue

Answer 16

prudence, self-command, benevolence

Question 17

prudence

Answer 17

general wellbeing of the person, the care of health, and he fortune of the rank and reputation of the individual

Question 18

merchants and manufacturers

Answer 18

• owners of capital
• interest of this class not positively correlated with the general interest because the rate of profit is not directly related to economic growth
  a) they want to lower wages
  b) they want to increase their profits
  c) it’s in their interest to increase prices
• patient, superior knowledge, prudent, attentive
• they are self-interested, overwork workers, selfish, misleading

Question 19

landlords

Answer 19

• interest strictly connected with the general interest of society
• lack mental efforts, struggle to identify their own interests
• least subject to monopoly, communicate, have no secrets
• easily tricked because they’re dumb, do not make sensible economic decisions, unfeeling, ignorant, unproductive

Question 20

workers

Answer 20

• dependent on other classes
• interest of the working class aligned with general interest
• industrious, intelligent, moral, creative, moral
• DOL leads to ignorance/stupidity

Question 21

self-command

Answer 21

self command is a part of virtue because otherwise:

1) our passions might mislead us
2) self command is the virtue through which others arise
3) if we don’t have self command, we hurt others

Question 22

real wages

Answer 22

aka real consumption.indicator of the general opulence of society

Question 23

care

Answer 23

ordered in an outwardly expanding circle, starting with ourself, then family, then others

Question 24

sympathy

Answer 24

• backbone of moral sentiments
• moral bond is created through sympathy
• “fellow feeling” with any passion
• sympathy is the correspondence of sentiments

Question 25

mutual sympathy

Answer 25

the pleasure of having sympathetic feelings

Question 26

approbation

Answer 26

can be achieved by behaving well or parading wealth

Question 27

theory of profit

Answer 27

Ricardo assumes constant average prices - relates everything to corn

1) increase in corn, increase in labor
2) no substitution between capital and labor (labor embodied does not change)
3) all prices are reducible to profits and wages; rents not included because it is a residual determined by prices
4) profit rates in the economy is determined by the agricultural sector
5) profit rates across sectors equalized
6) profit rate in the in the economy = profit in the no-rent land
7) diminishing productivity in agriculture would also cause profits to be squeezed out steadily by higher and higher rents

Question 28

profit squeeze

Answer 28

diminishing productivity in agriculture causes profits to be squeezed out by higher and higher rents

1) rents not directly responsible for squeezing out profit
2) rather, it is the increase in the cost of labor created by increases in the cost of corn
3) increase in wages redistributes a larger and larger share of net produce from profit to rent

Question 29

corn laws

Answer 29

• tariffs on imported food designed to keep prices high for cereal producers in GB
• imposed steep duties making it too expensive for anyone to import grain from other countries

Question 30

rate of profit

Answer 30

ratio of net produce on no-rent land to wages (expressed in terms of corn)

1) rate of profit must decrease
2) determined by the agriculture sector
3) profit rate = profit in the no-rent land
3) profit rates across sectors equalized

Question 31

labor theory of value

Answer 31

an attempt to explain the value of commodities by the amount of labor that went into them. an attempt to explain the relative prices n terms of the labor used i n them
-price of X is proportional the labor price of Y

Question 32

theory of rent

Answer 32

because land is abandoned, there no rent is paid on it.
second grade land brought under cultivation, rent paid on the first land; no rent paid on the second (only profit)
continues….

Question 33

net produce

Answer 33

total produce - wages

Question 34

one factor economy (with no trade)

Answer 34

1) labor services are the only factor of production
2) labor productivity is constant
3) the supply of labor services is constant
4) only 2 goods are imported for production and consumption: wine and cheese
5) labor is mobile between the 2 sectors
6) competition allows workers to be paid a competitive wage; allows them to work in an industry that pays the highest wage

Question 35

production possibilities frontier

Answer 35

• shows the max amount of a good that can be produced for a fixed amount of resources
• linear
• when economy uses all of the resources, the opportunity cost is equal to the absolute value of the slope o the PPF
• it is constant because unit labor requirements are constant

Question 36

Ricardian trade model

Answer 36

differences in the productivity of labor between countries causes productive differences, leading to gains from trade (explained by differences in technology)

Question 37

comparative advantage

Answer 37

a country has comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries

Question 38

opportunity cost

Answer 38

how much of this good, apples, you would have to give up to produce an additional unit of oranges