Labor Theory Of Value

  

Categories: Econ, Financial Theory

You ever wonder why wine can be sold for as cheap as a couple dollars, and as much as thousands of dollars? Or how things get their prices at all? It’s kind of baffling if you try to think about how much goods and services are worth objectively.

The labor theory of value argues that the value of goods and services is more subjective than objective, and largely depends on the amount of labor required to make the good or do the service.

No, that doesn’t mean working slower will lead to increased prices for your goods, since someone else can work faster and sell the same good for cheaper. Rather, it’s the amount of labor that’s reasonable to produce whatever good...given the average production time and technology at the time. The more time and care that goes into making something, the more expensive it will be.

Both Adam Smith and Karl Marx cited the labor theory of value. Marx even went so far as to say that capital...the means of production...is just "accumulated labor," since all of the capital we have (think: buildings, equipment technology) is a result of past work.

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Econ: What are Marginal Product of Capit...2 Views

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and finance Allah shmoop What are marginal product of capital

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and marginal product of labor You know those silly economists

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always thinking on the margin and about inputs and outputs

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if you're not in the know while thinking on the

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margin means thinking about an additional unit of something like

00:22

inputs sometimes called factors are the things firms used Teo

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make stuff to sell An output is thie ending product

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that goes to the consumer market called product by firms

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The marginal product of capital asks how much more product

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the output would we have if we added one more

00:40

unit of capital to the production process Well the marginal

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product of labour is the same except while we switch

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the input of capital with the input of labor the

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marginal product of labour asks How much more output would

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we have if we added one more unit of Labour

00:56

into the system Well with both of these were not

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looking at total output but rather how much more we

01:01

get if we tinker around with our inputs of it

01:03

So let's take a look at man's best friend to

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see how marginal product of capital in marginal product of

01:08

labour interact And no we don't mean dogs We're talking

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about the one in your pocket Yes your phone In

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a cellphone factory you've gotten assembly line with embryonic phones

01:17

making their way through the production process On that assembly

01:20

line there's a mix of humans and robots each specialized

01:23

in an area of phone production A firm has the

01:26

goal of increasing profits which means reducing costs as much

01:30

as possible and increasing revenues as much as possible So

01:33

sure having the assembly line helps But what mix of

01:37

robots and humans will cost the least or have the

01:40

least expense Well that's where the least cost rule comes

01:43

into play and least cost Rule says that to minimise

01:46

costs you find the amount of marginal product that a

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dollar spent on each input type makes and then you

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set them equal to each other at the phone Jess

01:55

Station Factory Well that means the firm can figure out

01:57

how many workers to hire and how many machines to

02:00

rent to minimise costs So let's take a look The

02:03

firm's handy dandy marginal product chart If we look at

02:06

the marginal product of laborers and the marginal product of

02:08

machines Well we can see each additional one of them

02:11

yields less and less marginal output That's the law of

02:14

diminishing marginal returns rearing its ugly head If laborers cost

02:19

ten bucks an hour and machines can be rented for

02:21

eight bucks an hour then we can calculate the marginal

02:24

product a price ratio for each quiz time How many

02:27

workers and how many robots will the firm hire Well

02:30

remember firms can get the most bang for their buck

02:32

by employing the quantity of inputs where their marginal product

02:36

to price ratio equals each other depending on how much

02:39

money the firm has Well it has a few different

02:41

options The phone firm could hire one worker into machines

02:44

each which have a marginal product to price ratio up

02:46

Six Let's think about what that means for a minute

02:49

The first worker hired would result in a marginal product

02:51

of sixty sixty units still adding sixty more phones to

02:54

total output But at what cost Ten bucks Six additional

02:58

phones per dollar Well the first machine is adding sixty

03:01

four more phones to total output for eight bucks which

03:04

means eight more phones per dollar Eight more phones for

03:07

dollars better than six phones for dollar right So we

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hire a second robot A second robot will only bring

03:13

in an additional forty eight phones and it still cost

03:16

eight bucks to rent So for the second phone assembling

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robot that's forty eight divided by eight dollars That's six

03:21

additional phones per dollar spent who Wait a minute here

03:25

That's the same marginal product to price ratio As the

03:28

first human you might be thinking Why not just hire

03:31

all robots Well because hiring the first worker is a

03:35

better deal than hiring the third robot Hiring the first

03:38

worker gets you six phones per dollar and the third

03:41

robot gets you only four phones per dollar which is

03:44

why the least cost rule here works If your MP

03:48

over peas are unequal it means you're missing out on

03:51

a more cost effective input combo if the phone firm

03:54

has more money while it could hire where MP Over

03:57

P is for which means to workers and three machines

03:59

and could also higher where MP p o ver p

04:01

equals two which means three workers in four machines firms

04:05

have to know their marginal product of capital in marginal

04:07

product of labour so they can tinker with the numbers

04:10

finding the least cost way to produce their product because

04:13

otherwise some other firm will be finding a lower cost

04:15

way to make the product they could then use that

04:17

advantage toe undercut competitors pushing them out of the market

04:21

It's kind of like Survivor but with firms everybody's gotta

04:23

stay neck and neck to keep their skin in the

04:25

game or else you know they'LL get voted off the

04:28

island So if you're a firm tinker away with marginal

04:31

product and hopefully you'LL never hear the words of the 00:04:33.597 --> [endTime] tribe has spoken What

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