Production & the Market Process

Robert P. MurphyMises Academy

July 20, 2011

Lecture 1: Chapter 5 of Man, Economy, and State

Chapter 5 of MES1. Course Description

2. Review: Supply of a Good

3. The Evenly Rotating Economy1. Definition2. Analytical Function3. Problems

IV. Mathematical Econ

1. Versus Verbal2. Causality vs. Mutual

Determination

V. Assume Completely Specific Factors

VI. Assume Joint Ownership

I. Course Description

II. Review: Supply of a Good

III. Evenly Rotating Economy

A. Definition

In the ERE, all “variables” or “parameters” that affect economic outcomes are held fixed. Subjective preferences, resource supplies, technological know-how, population, are all constant.

In the ERE, things “change” in the sense that raw materials are transformed into retail goods, which are then consumed. But the whole cycle predictably ends where it first began.

B. Analytical Function of ERE

●Abstracts away from change and allows economist to focus on the equilibrium relationships (e.g. wages exactly equal to marginal product, etc.)

●Crucially distinguishes between interest and profit. (Capitalists earn interest, but entrepreneurs do not earn pure profit, in the ERE.)

C. Problems

●No reason to hold money, yet we use ERE to discuss money price.

●Action depends on uncertainty, yet complete certainty in ERE.

IV. Mathematical econ

A. Versus Verbal

B. Causality vs. Mutual Determination

V. Assume Completely Specific Factors

VI. Assume Joint Ownership

Workers and natural

resource owners have

to wait for revenue from

sales!