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Lecture 2

ECON 314 Lecture 2 - Lewis Model.docx

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Department
Economics (Arts)
Course
ECON 314
Professor
Eesha Sen Choudhury
Semester
Fall

Description
Lewis Model  Agricultural sector was family farm based - subsistence farming - there is not any extra after you consume in this example so the economy can't grow . The number of kids also affected  With so much under utilized labour in agricultural sector who claim part of output as there consumption - you use this under used labour in a sector of production where you can sell their goods and make profits, this is why he introduced manufacturing sector  Assumptions o The economy has two sectors - agricultural and manufacturing o The agricultural sector has surplus labour, such that MLA=0  Labour that is additional, surplus, under utilized  MP = marginal product = returns on the last product that is produced o Labour in the agricultural sector share the output equally such that wages are determined by the average product  W = AP L wages = average product of labour  Wages = MP = profit maximizing o All wages are consumed and all the profits are saved in the manufacturing sector and reinvested o The supply curve of labour is assumed to be infinitely elastic at the wage ratemW in the manufacturing sector  The Traditional (Agricultural Sector) AP = TP/LA* The Moderns (Industrial) Sector  Here are profit maximizers, won't give wage to people who don't do anything for us  Optimal employment is L1 - people migrate from agriculture for wage r
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