Unit 2 - Technological Change, Population and Economic Growth Flashcards
Malthusian Economics
- A sustained increase in income per capita would be impossible
-Even if tech improved raising the productivity of labor, as soon as people would be richer, they would have more children - Continuous increase would eventually stop (cannot go on forever)
- Malthusian trap/vicious cycle: poverty → tech improvement → increase in pop. → crash → poverty
Why do we need models?
- The economy depends on millions of factors
- Need to reduce to fewer variables that are essential for our question
Fishers Model
- Built a model to capture all elements that mattered in the economy → used model to show interactions in a set of prices that did not change → conducted experiments showing the effect of changes in supply
How to build a model
- Construct a simplified description of conditions under which people take actions
- Describe in simple terms what determines the action that people take
- Determine how each of their actions affect others
- Determine outcome of these actions → often an equilibrium/something constant
5.Try to get more insight by studying what happens when conditions change
What makes a good model?
- Clear
- Predicts Accurately
- Useful
- Improves communication
Ceteris Paribus
- All other things equal
- Used to only focus on how one variable changed another
- May be misleading!
Innovation rent
when you figure out an innovative way to reduce production costs that others cannot reproduce and you match the price (P) of your product to competitors → your profits are much greater than theirs
Economic Rent
benefit from option taken - benefit from next best option
reservation option
- aka next best alternative
- he alternative action with the next greatest net benefit (also called “fallback option”) = opportunity cost
opportunity cost
reservation option
4 key ideas of economic modelling
- ceteris paribus
- incentives matter
- relative prices help us compare alternatives
- Economic rent is the basis of how we make choices
How we escaped the Malthusian trap
Capitalism
- Private Property
- Markets; Darwin (survival of the fittest), forces innovation, competition
- Firms; most production is done in firms
What is technology?
- We can describe technology as being labor intensive or energy intensive
- When comparing how much labor and energy is required to produce the same quantity of good between different technologies → the least labor and energy intensive wins
- Making decisions about technology also requires economic information about relative
Isocost Line
iso = same
A line along which all the combinations of workers and raw materials cost the same amount
Calculation of Cost
Equation
Cost = (wage x nr of workers) + (price of raw materials x amount of raw materials) =
= ( w x L ) + ( p x R)
How to calculate isocost line
c = wL + pR
–> pR = c - wL
–> R = c - wL/p
How to calculate Profit
profit = revenue - cost
How to calculate Change in Profit
The change in profit is equal to the fall in costs associated with adopting the new technology, and the rise in profits that results
Change in profit = change in revenue - change in cost
Modelling a dynamic economy
Innovation and profit
Calculating how cost-reducing innovation raises the profits of a firm - how the isocost lines changes with the new relative prices
creative destruction
when businesses fail because they cannot keep up with technological advancements of competitors
The 2 determined causes for the timing and location of the IR
- Wages relative to the cost of energy and capital goods went up in britain in the 18th century (this had not been the case in earlier historical periods)
2.Wages relative to the cost of energy and capital goods were higher in Britain during the 18th century than anywhere else
Deminishing Average Product of Labour
Factors of production (FoP):
- Land
- Labor
- Capital
- Entrepreneurship
formula for the average product of labor
average product of labor = total output/total number of farmers
Production function
the amount of output that will result for one more combination of input
–> describes differing technologies capable of producing the same thing
cause of diminishing average product of labour
- More labor devoted to a fixed quantity of land - children of farmers
- More (inferior) land brought into cultivation - earlier generations of farmers would have picked the best land, so any new land would be worse
⇒ Incomes decrease when population grows
equation of an isocost line
cost = (wage x labour) + (price of raw materials x amount of raw materials) => c = wL + pR
- L - labour - the number of workers
And what they did is that they rearranged the formula to make R (the tonnes of coal - the amount of raw materials used) the subject,
And then the gradient (the slope) of the isocost line is - w/p - which means wage/price of raw materials - the ratio between the two variables on the x-axis and y-axis. And it has a minus in front because the curve is downward sloping
2 main ideas of the Malthus model
- The law of diminishing average product of labor
- Population expands if living standards increase
The Malthusian Trap and Long-Term Economic Stagnation
- The major long-run impact of better technology is more people
- Possible explanation of long, flat portion of the hockey stick
- Malthusian interpretation: higher real wages → young people marry earlier → have more children → also lower death rates → population growth eventually forced real wages back to subsistence levels (vicious cycle)
Conditions for the Malthusian trap
- Diminishing average product of labor in production
- Rising population in response to increases in wages
- An absence of improvements in technology to offset the diminishing average product of labor
- The malthusian model is no longer a reasonable description of the world because of the permanent technological revolution
