Week 2 Flashcards
What are some good indicators of economic growth (ie other factors that follow similar trends to GDP)?
- real wages
- population
What is equilibrium?
A situation that doesn’t change unless a force acts upon it
What does ceteris paribus mean?
Holding all other things (in/outside of the model) constant
What does ‘incentive’ mean?
Refers to the economic reward or punishment, which influences the costs and benefits of alternative courses of action.
It’s the concept that every alternative course of action presents its own set of costs and benefits and thus, consumer decisions will be influenced by how they perceive the relative costs and benefits of these different alternatives.
Why is relative pricing an important concept?
Consumers can only derive the value of a good or service from its pricing relative to its alternatives. Furthermore, relative pricing assists consumers to compare products.
What is the concept of ‘economic rent’?
The surplus benefit yielded after taking in to account the economic cost (ie the monetary and subjective costs)
What makes a good economic model?
- Clear
- Helps to accurately predict the outcomes of different scenarios relating to the subject matter
- Improves communication regarding the particular subject matter
- Useful
What are isocost lines?
Combinations of inputs that require the same cost
What is innovation (Schumpeterian) benefit?
The economic benefit - lowering production cost/increasing profit - of adopting a new technology
What is creative destruction?
When firms DO NOT adapt to new technologies resulting in them not being able to compete in the market against firms that DO adapt to new technologies.
Why did England grow first?
English wages relative to the price of other inputs was much higher than other countries. This incentivised firms to adopt less labour-intensive technologies that could reduce labour costs and increase overall output.
What are the key principles of Malthus’ Law/Model?
Malthus’ Model/Law manifests the self-correcting behaviour of an economy when technological improvements occur.
MAIN IDEA: In the long run, an improvement in technology will lead to an increase in population but not wages.
How?
When technology improves:
1. Average output per worker rises
2. Worker income increases
3. Worker can now afford to have a family –> population rises
4. More people to distribute the same resources between –> income per family/worker is reduced
5. Can no longer produce as much per worker because each worker has less farmland
6. Income per worker falls
In the end, each worker gets a subsistence (minimum standards) level of income to survive
Note: This model is based on farmers and food supply
Why didn’t the Malthus Law hold in the long term?
It did not hold because Malthus’ Law is premised upon the fulfilment of 3 key principles of which the third was broken during the IR.
1. Diminishing average product per labour
2. Rising fertility with increased income/wage per labourer
3. An absence of continual improvements (ie rapid and successive) in technology to offset the diminishing average product of labour
What is opportunity cost?
Opportunity cost is the forgone benefit that would have been derived from the next best option.
What is the law of diminishing marginal product?
The increase in output per additional unit of input falls.
