Question

6. Classical economists made the concept of the surplus, and how that surplus is divided, key to their work. What did they mean by this concept? Explain how Ricardo uses the concept in his critique of the Corn Laws. How does Sraffa’s work develop this concept? Explain how Sraffa’s work is based on his interpretation of Ricardo, especially the latter’s Corn model in his “Essay on Profits.” Contrast classical views of how the rate of profit is determined to the neo-classical view that the return to capital wil be equal to its marginal product.

*Lengthy answers prefered

Answer 1

In economics surplus is described as the amount of an asset or a resource that exceeds the expected level of utilization. There are two type of economic surplus. They are :

i. consumer surplus

This is an economic situation where desired products are available in the market at a lower price than the price which the consumer actually expected for the same product.

ii Producer surplus

Producer surplus on the other hand is a market situation where products can be sell at higher price, than the expected rate which the producer was willing to market it.  

The fact is that the consumer surplus and producer surplus are factors which are mutually exclusive, because what is good is one, is bad for the other.  

Surplus is a market situation which usually occurs when the cost of a product is initially set too high, and nobody is willing to pay that price. In such circmatances the producers forced to sell the product at a reduced cost inorder to move the stock.

Surplus makes a market situation of diseqilibium between supply and demand of the product. Inorder to compromise such situation goverment will take steps to implement 'floor price' or a minimum price at which the product can be sold. It will always be a price that is higher than the price which consmers used to pay, to get the business benefitted.  

Ricardo's concept

As per the Labour Theory of Value, the amount of labour required to produce an economic good determines the actual value of the good. Along with David Ricaro, Adam Smith and Carlmarx also supported this theory. According to this theory the value of a commodity is closely related by the average number of labour hours required to produce that commodity.  

The Corns Laws imposed in United Kingdom dring the first half of 18th centry is closely connected with surplus market situation. According to this theory tariffs and other tade restictions were imposed all type of imported food and food grains. The objective behind this diplomatic move was to ensure the price of the food grains should remain high for the imported goods, which should be helpful for the domestic producers.  

Sraffa Model

Sraffa model aimed at the transformation of real economic system into a new price system. According to this model with the use of appropriate multipliers, the physical surplus of each commodity produced, will be in the same proportion, by which such commodity is used as a means of prodction.  

The surplus or the net income derived from this new price system can be used as the meausre of prices and wages of the real economic system.  

According to Ricardo when real wages increase, real profit decrease, because the revenue received from the sale of goods manufactred should be split between profit and wages. Profit always depend or high or low wages, wages depends on the price of necessaries, and the price of necessaries depends on the price of food.

According to classical economic theory, the value of a product is derived from the cost of raw materials and the cost of labour. Neo classical economists on the other hand beleves it is the value of the product determins the price of the product and its market demand.  

According to neo classical economists, individual maximise utility, on the other hand firms maximise profit. Aggregate market supply and demand is determined by both the individuals and firms equally. Hence the interaction between consmers and firms determine equilibrium output and price.