Unit 16 Flashcards
Introducing new technology can earn firms
schumpeterian innovation rents, firms who fail to innovate are unable to sell product above cost of production = creative destruction
- new tech requires new machines, accumulation of capital is a necessary condition for the advancements
- Technological advance is required.
Productivity model
Capital equipment x axis, output per worker y axis
- average product of capital = Y/K
- marginal product of capital at A = change in Y/ change in K
Technological process has lead to
every level of capital equipment providing higher level of output per worker.
- also is diminshing marginal product of capital
- tech progress shifted the production function up: stimulated by the prospect of innovation rents
Offset the DMR to capital:
capital productivity, measured by the slope of a ray from the origin, remained roughly constant over time in the technology leaders.
- tech progress plays crucial role in preventing diminishing returns from ending long run improvement in living standards resulting from the accumulation of capital goods
Beveridge curve
Beveridge noticed that when unemployment was high, vacancy rate was low; and when unemployment was low, the vacancy rate was high
Beveridge curve during recessions
there will be high unemployment: when the demand for a firm’s product is declining or growing slowly, firms can manage with their current staff even if a few of them quit or retire. As a result, they advertise fewer positions. In the same conditions of weak demand for firm’s products, people will be laid off or jobs entirely eliminated
During boom Beveridge curve
unemployment will decline: number of vacant jobs posted by firms increases, more workers employed to cope with rising demand for products
Determinants of economic performance in the long run
- work inventives
- Investment incentives
Markup/ firm model
X axis = markup
Y axis = number of firms
Downward sloping straight line, if markup is above equilibrium, attracts firms to enter, extension along line until equilibrium
- if markup below equilibrium, firms leave, until equilibrium.
As markup falls - real wage rises.
How can business conditions affect the markup model
if business conditions rise, if expropriation falls - lower markup to convince u as a firm to enter the industry, so red line shifts down, number of equilibrium firms increases
What lowers the markup at which entry and exit are 0 - equilibrium point
- higher competition
- Lower risk of expropriation of owners in home economy
- Higher quality environment for doing business
- Lower expected long run tax rate
- Lower opportunity cost of capital, e.g. a lower interest rate on bonds
- Lower expected profits on foreign investments
- Lower expected long terms cost of imported materials
Better tech
= better output = higher price setting curve as real wages
New technology shifts up output per worker and price setting curve process
A-D: introduction of new tech leads to a rise in unemployment
D-E: high profits encourage new firms to enter
E-B: lower unemployment leads to rising real wages
B: new long run rate of unemployment is 4%
What is the innovation diffusion gap
How quickly new tech spreads between firms
- firms
- unions
- associations of owners
All affect
Impact of new tech on income inequality
- initially increases inequality but final is decreased inequality as employment rises
Shift of people from working in goods to services
- productivity in some services reduces the shift
- substitution of goods for services reduces the shift
- an increase in relative demand for services increases the shift
Technological progress played a crucial role in preventing
Diminishing returns from ending the LR improvement in living standards resulting from the accumulation of capital goods.
Explanation for beveridge curve
When unemployment is lower more labour matching, more information, skills required is also a factor
Employment and wage adjustment gap
- also affect speed of reaching new equilibrium
- gov policy, product market regulation, competition policy
X axis = capital per worker
Y axis = output per worker
Tech progress can make investment in a more capital-intensive tech in home economy more profitable than other uses
True
- by raising MP of capital at a given K/N, new tech makes return to investment in more capital intensive tech at home more attractive.
X axis = capital per worker
Y axis = output per worker
Slope of ray from origin to prod function is steeper when capital output ratio is lower
True
- slope of ray is Y/K, so a steeper ray implies higher Y/K, which means a lower capital: output ratio
- steeper means more output per unit capital, so means lower capital per unit output
It is not possible to show higher labour prod is associated with a more capital-intensive tech using a single production function
False
- possible as shown by movement to right along a single concave production function from a lower to higher level of output per worker
Beveridge curve will shift downward if
- information about job vacancies improves
- unemployment benefits become less closely tied to the wage and occupation of an unemployed person’s previous job.