Week 4

Question 1

What did David Ricardo agree with Malthus and Smith about?

Answer 1

On the tendency for wages to fall to a subsistence level

Question 2

What was Ricardo and Smiths view on capitalists affect on profit?

Answer 2

That the strong urge for profits and to leave one business for another more profitable one has the effect of equalising the rate of profit for all.

Question 3

What was Ricardos analysis of trade late reformulated to?

Answer 3

Theory of Comparative Advantage

Question 4

What does comparative advantage show?

Answer 4

That mutual gains from trade are possible despite one country having an absolute advantage in the production of both goods.

Question 5

What is the law of comparative advantage?

Answer 5

That countries should specialise in good and services they can produce at a lower opportunity cost compared to another country.
Only then should they trade with another nation.

For example:
2 countries, same factors of production, making computers and cotton
Country A specialises in Computers, country B in cotton
‘It only makes sense for country A to sell a computer to country B if they get more cotton in return than they could have produced themselves using the resources they used to make the computer’

Question 6

What is Ricardos take on Turgot’s idea of diminishing returns?

Answer 6

He applied this theory to land, stating that people farm the best land first, so as land under agriculture grows the additional land farmed will be less productive than earlier plots.

Question 7

In the below scenario, what is the maximum rent someone with type 2 land will pay for type 1 land?

Type 1 land is more fertile, producing more corn

Type 2 land is slightly less fertile, producng less corn

Answer 7

The difference in the lands productivity,,,,i.e the amount of corn produced given the same factors of production.

THIS IS RENT

Question 8

What assumptions are made with Ricardos theory of rent?

Answer 8

• land is fixed in supply and has no alternative uses.
• the other input into production is a composite input (labour +
  capital: think worker + shovel).
• There is an equalised available rate of profit in the economy as a
  whole (the “average profit”).
• Wages are fixed at subsistence rate (w*).

Question 9

What is the final equilibrium position in Ricardos model?

Answer 9

-Where wages are paid at subsistence rate
-All the surplus above that wage cost is rent
-Profits are squeezed

Question 10

Need to study PDF and diagrams for rest of Ricardo

Question 11

What did Ricardo propose following his theory?

Answer 11

TO reduce rents through reducing trade barriers, such as import tariffs, which would in turn lower price of grain and reduce rents and the share of national income going to landlords.

Question 12

If on a diagram we have an expression for Marginal Product, and we know the going wage rate, how can we solve for surplus rent?

Answer 12

The area of the triangle above the wage rate

Question 13

What school of thought did Karl Marx belong to? Who else was in this school?

Answer 13

Classical Economicsts:

Marx, Adam Smith and David Ricardo

Question 14

What was the Labour Theory of Value?

Answer 14

The LTV argued that only labour can add value - i.e raw materials are inanimate and it takes humans to manipulate and combine them to create additional value.

Question 15

What is the ASNLT concept?

Answer 15

Average Socially Necessary Labour Time

The price of a good or service in the market is determined by the amount of labour typically required to produce it.

Question 16

What is the process of labour in the economy as proposed by Marx?

Answer 16

1st) Workers sell labour power (LP) as a commodity in the labour market
2nd) Workers receive money (M) in the form of wages in return for their labour
3rd) Capitalists buy the LP and combine it with raw materials and technology/machines -> creating goods they sell for money

Question 17

According to Marx, where does the value come from for the following:
1) Raw materials / machinery
2) Goods produced
3) Labour power

Answer 17

1) Comes from the labour it takes to extract them
2) Comes from the labour it takes to produce them
3) The value of the goods and services needed to keep that worker selling their labour

Question 18

What is the differencce between living labour and embodied labour according to Marx?

Answer 18

Living labour = The time a worker is employed for; the work being performed in real time.
Marx saw living labour as a source of new value

Embodied labour = This represents labour that has already been performed and the value of which is ‘crystallized’ in commodities, machinery or other means.
-These ‘dead’ labour products contribute to the current production process, but they don’t add new value; they simply transfer their existing value into the new goods

Question 19

According to Marx, if the labour that went into the tools, raw materials etc used to produce a shovel where 8, and the amount of hours necessary to pay the worker in order for them to continue returing to work was 8, what is the value output of the shovel?

Answer 19

Trick question, even though the employer paid the worker 8 hours, the worker could have added 12 hours of value, therefore resulting in a greater value output.

Question 20

According to marx, where does the surplus value come from?

Answer 20

Surplus value is the profit an employer makes, it comes from the difference between the labour paid to the worker and the value that they add

Question 21

According to Marx, from what two conditions does Surplus Value arise?

Answer 21

Surplus Value arises because:
-There is a labour market
- The value paid to a worker is less than the value they add

Question 22

What term does Marx use to refer to the ‘taking of surplus value by the employer’?

Answer 22

Exploitation

Question 23

How is the rate of exploitation calculated?

Answer 23

S/V
S = paid living wage
V = Unpaid living Labour (surplus value)

Question 24

According to Marx, what does C, V and S mean?

Answer 24

C = Constant Capital; embodied labour

V = Variable capital; Paid Living Labour

S = Surplus Value; Unpaid Living Labour

Question 25

How could the rate of explopitation be increased?

Answer 25

By increasing S or reducing V

Question 26

According to Marx, what is the rate of profit and how is it calculated?

Answer 26

The rate of profit is the ratio of surplus value to the sum of constant and variable capital

R = S / (C+V)

I.E How much the employer is taking compared to the amount paid to capital and labour

Question 27

According to Marx, what is the Organic Composition of Capital?

Answer 27

A measure of the relationship between constant capital (premises, machinery and materials) and variable capital (wage labour)

OCC = C / V

Question 28

Why did Marx argue that there was a tendancy for the rate of profit to fall over the business cycle, leading to booms and busts?

Answer 28

Rapid and sustained developments in technology and production reduced the costs of production and increased labour productivity -> capitalists had to invest large portions of surplus value into new capital and machinery to get an advanatge over compeitors OR keep up with their competitors innovations

Question 29

How does the competitive pressure result in increases in labour productivity?

Answer 29

Pressure to invest parts of S into V -> leads to increase in Organic Composition of Capital -> more machines and technology per unit of labour and so increases in labour productivity

Question 30

How do we examine the affect of competitive pressure on the rate of profit equation?

Answer 30

R = s / (c+v) BECOMES

R = (s/v) / (c/v + 1)

Question 31

According to Marx, how do Economic Crisis occur?

Answer 31

Rate of profit falls due to pressure to invest -> acts as discouragement for profit-motivated capitalists to expand -> they reduce their rate of expansion, capital investment and other expenditures -> these reduced business expenditures flow through the economy -> workers lose employment and incomes -> lower demand for goods and services -> bankrupcies, redundancies, closures etc

Question 32

How could employers increase the rate of exploitation that increases R?

Answer 32

-Lowering wages (v)
-Increasing the length of the working day (increasing S)
-Improvements in the productivity / technology that produce the things that workers need to live (lowering V)

Question 33

How can the rate of profit be restored during and economic crisis and depression?

Answer 33

Firms go bust, factories and offices close -> the destruction of constant capital (c) ->lowering C/V -> increasing the rate of profit

Question 34

In basic terms, what is the primary difference between classical and neoclassical economists?

Answer 34

Classical = Followed the Labour Theory of Value -> that the value of a good is determined by the amount of labour required to produce it

Neoclassical = ‘Marginal Revolution’
focus shifted to marginal utility, arguing that value is subjective and determined by individuals’ preferences and the utility derived from the good….price reflected the balance between supply and demand rather than production costs alone

Question 35

What is constrained optimization? 3 types:

Answer 35

A model referring to how individuals, firms or governments make decisions to maximise their utility given limited resources

Consumer optimisation: Aim to maximise utility subject to a budget contraint

Firm Optimisation: Firms seek to maximise profits given constraints like production capacity, costs or resource availability

Government Optimization: Aim to maximize social welfare or economic growth, constrained by available resources, policy restrictions etc..