unit 2 Flashcards
what is net benefit
direct benefit – direct cost
what is opportunity cost
the net benefit of the next best action not
taken
what is a reservation option
the next best alternative
what is economic cost
direct costs + opportunity cost
what is economic rent
net benefit from option taken – opportunity
cost
what does the index of real wages mean
The term index means the value of some quantitative amount relative to its value at some other time which is usually normalised to 100
The term real means that the money wage has been adjusted to take into account changes of prices of time (inflation). The result represents the real buying power of the money workers earned
what are relative prices
Relative price is the price of one option relative to another often expressed as a ratio of two.
what are innovation rents
Innovation rents = profits from using the new technology - profits if you continue with the same technology as competitors
what is specialisation
Specialization means each person does just one or a few of
the large number of tasks necessary for some project or goal.
what 3 things does specialisation facilitate
- Learning by doing as we acquire skills by producing things
- Differences in ability: due to skill or natural surrounding some people are better at producing certain things than others
- Economies of scale: producing a large number of units is more cost effective
what is absolute advantage
Being more productive
in producing a good
means having an
absolute advantage.
what is comparative advantage
Having a lower relative
cost of producing a
good means having a
comparative
advantage.
All producers can benefit even when this means that one producer specialises in a good that another could produce at lower costs.
Countries are better off specialising and then trading goods with each other to save cost and become more efficient.
what is division of labour
specialisation in producing things either
within a firm or across society
what is production technology
the process that a firm uses to
convert a set of inputs into an output that it can sell.
what are factors of production
– the inputs into the production
process (e.g. raw materials, labour, capital goods, energy)
what is a production function
a relationship that tell us how much
output will be produced given the amounts of inputs used
how does a technology dominate another
it costs less at any set of input prices
what does a firms costs depend on
technology and input prices
what is cost of production
Cost of production = (wage x workers) + (price of a ton of coal x number of tons)
= (w x N) + (p x R)
how can isocost lines be used to tell us what technology to use
Isocost lines are used to compare the technologies that are not dominated
A change in the relative price of labour and energy will change the slope of the firm’s isocost lines
To draw an isocost line first calculate the cost and then find another point with the same cost such as the endpoints e.g. if no coal was used 4 workers could be hired with £40
how do you represent costs
- isocost lines join all the combinations of workers and coal that cost the same amount
- slope of isocost lines = -w/p
- the slope depends on relative price
facts about isocost lines
- Every point in the space is on one isocost line
- All points on the line have the same cost
- This is our definition of an isocost line
- Isocost lines are parallel
- Isocost lines closer to the origin represent cheaper combinations
- Any point above an isocost line costs more than points on the isocost
line
why was the price of labour relative to energy very high in Britain
- English wages were
higher than wages
elsewhere - Coal was cheaper in coalrich Britain than in the
other countries
what technology allow to happen
- Further technological
progress - Wage growth
- Falling energy costs
what 2 things can influence wage
How much is produced: the size of the pie that is to be divided between workers and the owners of other impetus
The share going to workers: this depends on how wages are determined and if workers have well paying employment opportunities other than their current job. E.g. if workers are competing for the same job and the next best alternative is a low paying job then wages are likely to be low
what are the key ideas in a model
Equilibrium – a situation that is self-perpetuating, meaning
that there is no tendency for the situation to change unless
an external force for change is introduced
* Endogenous variables – variables whose values are
determined by relationships built into the mode
* Exogenous variables – variables whose values are
determined outside the model
* Ceteris paribus – holding other things equal
if greta produces 1500 apples and 60 tons of wheat what is her opportunity or producing one apple. what is her opportunity cost of producing 1 one of wheat
apple production = 60/1500 = 0.04
wheat production = 1500/60 = 25
