Topic 2: Adam Smith Flashcards
Compare and contrast Mandeville the Clown with Adam Smith
- Adam Smith
- agreed with Mandeville the Clown that there’s unintended benefits from self-interested behavior
- Mandeville the Clown
- disagreed with Smith that there were automatic adjustments/invisible hand to full employment
- thought DEMAND CREATION caused full employment instead
IMPORTANT: What’s aggregate demand?
The total demand for goods and services in the economy
What’s the market price of labor?
WAGES
IMPORTANT: According to Adam Smith, what’s the relationship between market price (MP) and natural price (NP) of a good/service, ff there’s NO ECONOMIC INTERVENTIONS?
- MP > NP
- Supply of that good or service increases, therefore decreasing the MP until MP = NP
- MP < NP
- Supply of that good or service decreases, therefore increasing the MP until MP = NP
IMPORTANT: According to Adam Smith, what’s the natural price?
The natural price is the price that
- JUST covers the costs of production
- Ensures the Quantity produced stays constant (no entry/exit)
Who proposed the concept of Natural Price?
Adam Smith
In the long-run, what did Adam Smith think would happen to MP and NP?
MP = NP, as long as no economic interventions
According to Adam Smith, what changes when the NP and MP of labor are not balanced?
Supply of labor (pop’n) changes accordingly until MP = NP
What’re real wages?
Wages adjusted for INFLATION
IMPORTANT: According to Adam Smith, what’re the types of labor?
- productive labor
- unproductive labor
According to Adam Smith, what determines the demand for productive labor?
According to Adam Smith, the WAGES FUND determines the demand of productive labor
According to Adam Smith, what’s PRODUCTIVE LABOR?
According to Adam Smith, productive labor is labor employed to make a PROFIT, therefore a GOOD
According to Adam Smith, what’s UNPRODUCTIVE LABOR?
According to Adam Smith, unproductive labor is labor employed that does NOT make a profit and does NOT replenish wages fund, therefore a SERVICE
Eg. Servants, circus performers and other “buffoons” as Adam Smith called them LMAO
According to Adam Smith, what’s the effect of employing productive labor?
- employ productive labor that makes a good
- boss sells that good and make a profit
- boss uses profit to replenish the wages fund
- boss can now hire more productive labor with the wages fund
VERY IMPORTANT: According to Adam Smith, Malthus and Ricardo, what’s the WAGES FUND?
According to Adam Smith, the wages fund are a boss’s savings to employ PRODUCTIVE LABOR
The boss replenishes the wages fund with profits from employing productive labor
What’re public works?
Public goods and services necessary for societal welfare
But, they aren’t provided by the free market bc they AREN’T PROFITABLE to private firms