ECN Latest Exam 2
A Recanation of the Wages-Fund - ANSWER-· In an 1869 book review published in
Fortnightly Review, Mill seems to have repudiated the wages-fund doctrine when he
argued that although the maximum amount of funds available to pay labor is fixed, a
given labor force and wage rate may not exhaust the entire potential fund.
· Mill appears to have come to the conclusion that the real limit to increases in wages
comes at the point at which the employer would be ruined financially or driven to
abandon the business if wgaes were increased further.
Accumulation and Falling Rate of Profit - ANSWER-· Marx followed the classical
tradition of Smith, Ricardo, and Mill in predicting a falling rate of profit over time.
· Under capitalism, all industrialists try to acquire more surplus value in order to
increases their profits.
· Although labor is the source of all value, capitalists paradoxically trn to more capital-
intensive production methods to do so.
· The individual capitalist can profitably substitute capital for labor because it takes time
to adjust to new production methods.
· The first capitalists to introduce labor-saving machinery will therefore be able to
produce at lower costst than his or her rivals and yet sell at a price determined by in the
markey by the prevalence of the less-mechanized firms.
· However, what is true for the individual capitalist is not true for the industry as a whole.
· If every capitalist introduces more machinery, the "organic composition" of capital is
increased, and surplus value falls.
· Hence the collective effect of each capitalist's drive to accumulate more capital and
more profit is to drive down the average rate of profit in the economy.
Assestment (Jevons) - ANSWER-· The impact of William Stanley Jevons on economics
can hardly be exaggerated
· As a father of the Marginalist Revolution (which gave birth to Neoclassical economics),
his path-breaking work on utility analysis marked a significant departure from
entrenched classical theory of value.
· Unfortunately, it seems that Jevons's independent discovery of utility analysis led him
to neglect the earlier cost-of-production emphases of classical writers, including Smith,
Ricardo, and Mill.
· In short, what he failed to recognize was that supply and demand mutually determine
price.
· Given that J.S. Mill provided a verbal treatment of supply-and-demand-determined
prices in his Principles (1848), and Fleeming Jenkin presented a graphical exposition in
his essay, On the Graphical Representatation, of Supply and Demand , published in
1870, this should not of been the case.
· In spite of the "sunspot episode," Jevons's overall effort in statistical analysis also
deserves very high marks.
· His numerous studies of price series as well as his readiness to raise questions
concerning both the quality of his data and statistical methods make his contributions to
applied statiscal science not only above the level of his time but considerably in
advance of it.
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,ECN Latest Exam 2
Assestment John Stuart Mill - ANSWER-· In terms of the history of economic thought,
John Stuart Mill stands as the greatest of the orthodox economists during the two
generations between Ricardo and Marshall
· Mill's Principles of Political Economy (1848) provided the most systematic, clear and
mature statement of classical economics.
· Beyond his concrete contributions, to economics, Mill's writings show him to be a man
of courage and honesty in his trenchant criticism of the status quo and his support of
reforms that were radical in his day.
· The last two books of the Principles are teleological (goal-oriented) and reveal his
concern for social reforms such as wealth redistribution, equal rights to women, rights of
laborers to form unions, and public education.
· It is this humanistic concern for greater equality of wealth and opportunity that sets Mill
apart from almost all other classical writers.
Class Conflict (Marx) - ANSWER-· Under capitalism, two classes emerge, with one
class being forced to sell its labor power to the other in order to earn a living.
· This contractual arrangement transforms labor into a commodity alien to the worker.
· The worker's alienation from his or her humanity occurs because the worker can only
express labor—a fundamental social aspect of personal individuality—through a
privately-owned system of industrial production in which each worker is an instrument (a
thing), not a person.
· Without the difference between the labor's exchange value (subsistence) and its use
value (value of labor's output), the capitalist would have no interest in buying labor
power, and hence it would not be salable.
· So the ingredients for social conflict are inherent in capitalism—alienation and the
polarization of classes.
Consumers Surplus (Marshall) - ANSWER-Consumer's surplus is considered one of the
most important operation concepts in Marshall's Principles.
Marshall developed and utilized the concept, originally proposed by Jules Dupuit, for
analyzing real-world problems like monopoly and taxation.
Marshall described consumer's surplus as the excess of satisfaction a consumer
derives from a good over what he or she pays for it.
He provided a numerical example using an "unimportant" commodity like tea to illustrate
consumer's surplus.
However, using the area under the demand curve to represent surplus poses problems,
particularly regarding Marshall's assumption of constant marginal utility of income.
Marshall acknowledged this issue and assumed constant marginal utility of income,
especially in the case of "unimportant" commodities where price changes have minimal
impact on real income.
Another problem arises when dealing with market demand curves, as they aggregate
individual preferences and income levels, making comparisons and additions of
consumer surplus across individuals impossible.
Despite recognizing these difficulties, Marshall still used aggregate consumer surplus in
analyzing monopoly and public policies like taxation and subsidization.
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, ECN Latest Exam 2
Das Capital (Mar'x) - ANSWER-· Marx's economic analysis of the capitalist system was
published in 1867 in the first volume of Das Capital.
· In this work, he sought "to lay bare the economic law of motion of modern society."
· Using his dialectial view of history as backdrop, marx ahd certain objectives in mind
when constructing his analysis of capitalism. Specifically, he wanted to show:
· 1) How the commodity form of market exchange leads to class conflict and exploitation
of the labor force.
· 2) How the commodity system will eventually fail to operate because of its own
inherent contradtions.
· 3) why class conflict under capitalism, unlike earlier class conflicts, should ultimately
result in rule by the formerly expoloited class rather than by a new ruling class.
· According to Marx, in pre-capitalist economies goods were produced primarily for their
use value (consumption by the producer).
· Under capitalism, however, people make a living by buying and selling things.
Therefore, goods are produced for their exchange value.
· This compelled Marx to develop a theory explaining exchange values (i.e., prices)
Demand Theory (Marshall) - ANSWER-Marshall asserted that demand is based on the
law of diminishing returns and rational consumer choice.
While Gossen, Jevons, and Menger described rational consumer choice, Marshall
explicitly related the equimarginal principle to the law of demand.
Marshall stated the law of demand as the inverse relationship between price and
quantity demanded.
He specified several ceteris paribus assumptions in gauging the functional relationship
between price and quantity demanded, including the time period for adjustment, tastes,
preferences, income, purchasing power of money, and price and range of rival
commodities.
Marshall showed how diminishing marginal utility and rational choice lead to a
downward-sloping demand curve.
He illustrated how a consumer reacts to a price change using the equimarginal
principle.
Marshall focused on the substitution effect in his discussion of demand, which leads to
greater consumption at lower prices.
The income effect, reflecting changes in purchasing power due to price changes, can
either reinforce or oppose the substitution effect.
Marshall acknowledged the possibility of Giffen goods, where the income and
substitution effects work in opposite directions, leading to an upward-sloping demand
curve for inferior goods among poorer individuals.
Elasticity of Demand (Marshall) - ANSWER-· In a contribution of unquestioned
importance to demand theory, Marshall described and categorized the concept of price
elasticity of demand.
· The idea was not unique to him (Fleeming Jenkin alluded to it in an 1870 essay), but
Marshal enlarged the concept greatly and essentially made it his own.
· As Marshall put it:
o *insert quote*
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