TP2 Exam Flashcards
Aggregate Production Function
DGP=A(K, L, anything else)
K = Capital
L = Labour
A = Technical Knowledge and Efficiency
Exogenous Growth Theory
- The aggregate production function gives decreasing returns to any single factor.
- Provides constant returns when all factors increase in the same proportion.
- The investment rate is a key determinant of GDP.
-High population growth = low income per person
-Institutions set the long run steady state.
Endogenous Growth Theory
- Adds human capital
- Constant MPK (Marginal Product Capital) achieved through spillovers.
- Private return does not equal private return.
Consumer and Producer Surplus
- Price (Y) vs Quantity (X)
- Supply upward slope
- Demand downward slope
- Consumer surplus: triangle between demand, crossing point, and (Y)
- Producer surplus: triangle between supply, crossing point, and (Y)
Pareto criterion
Not possible to make one person better off without making another worse off.
Compensation principle
Pursue policies which produce the most surplus possible. Winners can then compensate the losers and still be better off.
Sources of market failure
- Monopoly
- Asymmetric information
- Externalities
- Public goods
Defining public goods
1) Non-rival: The marginal cost of its provision to an additional consumer is zero.
2) Non-excludable: You can’t exclude someone from using it, so charging for its use is difficult.
Arrow, 1962: Externalities in production of knowledge.
- Indivisibilities: Only the inventor pays.
- Inappropriability: Selling knowledge is hard.
- Uncertainty: Unobserved research effort, moral hazard.
Moral hazard
The risk of being dependant on the moral behaviours of others.
Grilliches, 1962: Inventions.
- Care about useful knowledge or information and the factors determining its growth rate.
- Inventions are only one aspect of this.
Nelson, 1959: University research.
It’s not that Universities can’t do applied research, but they’re better at basic research.
Arrow, 1962: ____ Effect
- Replacement Effect
- Innovative activity is likely to be too little (from a society’s point of view) because innovators consider only the monopoly profit that the innovation brings and not the additional consumer surplus.
- Monopoly provides less incentive to innovate than a competitive industry.
Gilbert and Newbury, 1982: _____ Effect
- If a monopolist has to worry about a new entrant using innovation.
- Cournot competition - so competing on quantity, the market decides price.
- The monopolist must now consider losing their monopoly as a cost, so they will innovate to prevent the new entrant.
Blundell et al., 1999: Competition and innovation
Higher competition higher innovation, but usually the larger firms who innovate.
Aghion etc al., 2005: Competition vs Innovation graph
- Low competition: Little innovation as firms earn moderate efforts.
- Medium competition: Innovate to escape competition.
- High competition: Schumpeterian effect - Become leader-follower industries, reducing incentives to innovate.
Denicolo, 1996: Patent length
- The more competitive an industry, the more long, -narrow patents are desirable.
- Shorter the lower the cost of R&D
- The shorter the more elastic the demand.
Hold up problem
The hold-up problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thus reduce their own profits.
Bertrand competition
Competing on price. The firm with the lowest price takes the entire market.
Cournot competition
Competing on quantity, with the price set by the market.
Licensing (pro/cons)
- Enable the development of complementary inventions.
- Follow-on innovation.
- No incentive if competition is Bertrand.
- Can be anticompetitive through fixed payments or royalties.
Katz, 1985: Licensing
Social welfare is nearly always increased by licensing. It is desirable if total output increases as a result.
Spillovers definition
Capturing benefits of other parties investment in knowledge without paying its full price.
R&D co-operation methods
- As separate firms: High spillover = More incentive for R&D. Low spillover = Less R&D
- As a joint firm: Unambiguously beneficial.
Drivers of diffusion
- Cost of adopting
- Expected benefits
- Network effects
- Information and uncertainty
- Regulation
- Social: Goldbricking
Griliches, 1957: Diffusion pattern
- Origin
- Globe
- Ceiling
(Gradient decided by drivers)
Indirect vs Direct network effects
- Direct: As the number of consumers increases, the utility of each consumer also increases. Cause switching costs in network markets.
- Indirect: If size increases, users know the quality will increase. Are the consequence of switching costs in system markets.
Rohlfs, 1974: Price, number of users - Network effects
- A network market will fail if the firm has costs and must charge p>peak of the curve
- Two equilibriums, at fl one more customer will push the equilibrium to fh.
-fl is a critical mass. You can use low or free introductory pricing to get here.
