ECON 307

In Class Exercise Nine - Smith's Economics - Value, Prices and The Role of Government

1.  What is Smith's labor theory of value?  How did Smith turn this into a Cost of Production theory (but really from the buyer's perspective)?

2.  Smith talked about four different prices.  His "real" price was determined by how much "toil and trouble of acquiring it" - or basically the labor value (and capital value and land value) that it would take to make the good.  What are the other three prices?

3.  The "natural" price is the price that markets will tend to move to over time.  Although Smith did not graph this (of course) - modern day mainstream economists do.  So graphically and in words explain this.  Start with your "market price" being above the natural price in the peanut market.  You should show two graphs here -- the individual firm graph and the market graph.

4.  What did Smith say about taxes?  What criteria did he talk about (we discussed 5)?

5.  Did Smith think the government should keep a balanced budget?

6.  Any other questions on this material?