L2 - Economic Incentives

Net benefit

pay or enjoyment- effort or cost

Economic cost

Direct cost + opportunity cost

Economic rent

Difference between net benefit of the option chosen and its opportunity cost

Factors of production

Labour, land, capital (machinery), raw materials

Production function

Describes how a technology combines inputs to yield output

Y =f(L,K,E) (labour, capital, energy)

Dominance

Requires less labour and energy

How do you choose between options with no dominant option?

Firms cost function

Slope of isocost line represents

Relative cost of labour to coal (-wage/price of coal)

What happened to the labour/energy intensive processes during the Industrial Revolution

Optimal mix of inputs changes from being a labour intensive processes during to an energy intensive process

Innovation rents

First firm to adopt a new lower cost production earns additional profits

What happens to innovation rent

Other firms adopt the same technology and its competed away

Creative destruction

When firms don’t adopt new low cost technology and can’t compete