Unit 2 - Technological Change, Population and Economic Growth

Question 1

Malthusian Economics

Answer 1

• 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

Question 2

Why do we need models?

Answer 2

• The economy depends on millions of factors
• Need to reduce to fewer variables that are essential for our question

Question 3

Fishers Model

Answer 3

• 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

Question 4

How to build a model

Answer 4

1. Construct a simplified description of conditions under which people take actions
2. Describe in simple terms what determines the action that people take
3. Determine how each of their actions affect others
4. Determine outcome of these actions → often an equilibrium/something constant
   5.Try to get more insight by studying what happens when conditions change

Question 5

What makes a good model?

Answer 5

• Clear
• Predicts Accurately
• Useful
• Improves communication

Question 6

Ceteris Paribus

Answer 6

• All other things equal
• Used to only focus on how one variable changed another
• May be misleading!

Question 7

Innovation rent

Answer 7

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

Question 8

Economic Rent

Answer 8

benefit from option taken - benefit from next best option

Question 9

reservation option

Answer 9

• aka next best alternative
• he alternative action with the next greatest net benefit (also called “fallback option”) = opportunity cost

Question 10

opportunity cost

Answer 10

reservation option

Question 11

4 key ideas of economic modelling

Answer 11

1. ceteris paribus
2. incentives matter
3. relative prices help us compare alternatives
4. Economic rent is the basis of how we make choices

Question 12

How we escaped the Malthusian trap

Answer 12

Capitalism

• Private Property
• Markets; Darwin (survival of the fittest), forces innovation, competition
• Firms; most production is done in firms

Question 13

What is technology?

Answer 13

• 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

Question 14

Isocost Line

Answer 14

iso = same

A line along which all the combinations of workers and raw materials cost the same amount

Question 15

Calculation of Cost

Answer 15

Equation

Cost = (wage x nr of workers) + (price of raw materials x amount of raw materials) =
= ( w x L ) + ( p x R)

Question 16

How to calculate isocost line

Answer 16

c = wL + pR

–> pR = c - wL
–> R = c - wL/p

Question 17

How to calculate Profit

Answer 17

profit = revenue - cost

Question 18

How to calculate Change in Profit

Answer 18

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

Question 19

Modelling a dynamic economy

Answer 19

Innovation and profit

Calculating how cost-reducing innovation raises the profits of a firm - how the isocost lines changes with the new relative prices

Question 20

creative destruction

Answer 20

when businesses fail because they cannot keep up with technological advancements of competitors

Question 21

The 2 determined causes for the timing and location of the IR

Answer 21

1. 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

Question 22

Deminishing Average Product of Labour

Answer 22

Factors of production (FoP):
- Land
- Labor
- Capital
- Entrepreneurship

Question 23

formula for the average product of labor

Answer 23

average product of labor = total output/total number of farmers

Question 24

Production function

Answer 24

the amount of output that will result for one more combination of input

–> describes differing technologies capable of producing the same thing

Question 25

cause of diminishing average product of labour

Answer 25

• 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

Question 26

equation of an isocost line

Answer 26

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

Question 27

2 main ideas of the Malthus model

Answer 27

1. The law of diminishing average product of labor
2. Population expands if living standards increase

Question 28

The Malthusian Trap and Long-Term Economic Stagnation

Answer 28

• 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)

Question 29

Conditions for the Malthusian trap

Answer 29

• 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