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LE344 Dell_Notes - 10-4 October 18th MIDTERM Theory of...

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10-4 October 18 th MIDTERM Theory of value Use value vs. exchange value cannot be compared Value (natural price) vs. market prices Smith says the natural price is determined by a commodities natural cost of production (similar to St. Thomas Aquinas “just price”) the value is fixed at any one point in time Natural price is different from what goes on in the market place o The day to day price of a commodity is determined by supply and demand, not by the cost of production (in short run, the demand for a commodity and the supply of the amount of that commodity brought in that day create various daily prices) o Price will average out to the natural price (long run equilibrium price of the commodity) Theory of distribution Economy divided into three groups of people o 1. workers—wages o 2. capitalists (merchants, factory owners, farmers)—profit o 3. landlords—rent Those who benefit from industrialization are those who do nothing (thing to do is own land) Workers ----- the long run equilibrium wage is subsistence (just high enough to survive); this must be so as to not kill off or overpopulate the working class o Short run demand for labor = wages fund, F Short run supply of labor = L o Average wage = F/L o In a growing economy fixed and variable capital goes up (so does wages fund) o W=W subsistence , F goes up, F/L goes up, W > W subsistence This stimulates a drive up in the labor force and population rises, which will eventually drive the wage back down to W subsistence o While the supply curve is continually shifting out due to population growth, so is supply to keep wages at a constant level o In the long run, wages will equal subsistence o To see where wages are the highest are in the fastest growing economies (not the richest country) o Britain has experienced an increase in real wages of its working class is because the F has been growing and population has not been growing as much (mercantilists say that key to economic growth is low wages) o According to Smith, increasing wages are good for society (both morally and economically) workers with more money are healthier and
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healthier workers will work harder to improves their lives – labor supply curves are upward sloping For some people high wages will make them work less, but the idea of getting more work out of workers who are poorly fed is absurd Capitalists ----- to keep tabs on profits, look at interests rates in the better off countries o In a growing economy, profit rates will fall over time Landlords ----- primarily concerned with rents of agriculture o Get rich while doing nothing o Returns are determined by the price of food and the gong rate of profit (what the farmer can afford to pay them) o When population is growing and the economy is growing, rents will rise due to the increase in demand for food Self defeating because if profits decline, rents rise, and wages stay the same, the system will eventually collapse unto itself o
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