ECON113 Midterm Myself

Ibn Battuta and Jean Baptiste Tavernier

described Bengal as the richest country after visiting Asia

Agnus Maddison

created historical data

GDP

measure the size of the economy by calculating the markey value of all goods produced or income received (only final products)

GDP per capita

income per person; GDP/population

Disposible income

income-taxes; how much you can spend without debt

What does GDP & Disposible Income miss?

qualty of social and physical environment, free time, goods that aren’t bought, household produced goods

Nominal GDP

GDP in current dollars, sum of pq

Real GDP

GDP in constant dollars (accounts for inflation)

Purchasing Power Parity (PPP)

a statistical correction to compare the amount of goods people can buy with different currencies

Ratio Scale

vertical scale where GDP doubles moving up, compares growth rates

Growth Rate

change in income or GDP/original level of income or GDP

Recession

negative growth rate for 2 consecutive quarters

Adam Smith (1723-1790)

grandfather of economics, Wealth of Nations, invisible hand, free markets

Industrial Revolution

a wave of tech advancements starting in 18th century Britain; less labour more science/engineering

Technology

uses a set of inputs to produce an output

Technological progress

fewer inputs for the same output

Capitalism

economc system characterized by a combo of institutions; private property, markets, firms

Economic system

organization of the production and distribution of goods and services

Institution

laws and social customs regulating production and distribution

Capital goods

durable inputs (eg. machinery, buildings)

Markets

exchanging goods and services mutually, voluntarily, and competitivley

Firm

organizes production, capital goods, labour, and management of goods and services for profit

Labour Market

employers offer wages (demand), employees agree to work (supply)

Centralization

power in the hands of owners and managers, boss→inside firm

Decentralization

power in the hands of buyers and sellers, competition→in the market

How does capitalism lead to higher living standards according to Adam Smith?

technology creates competeing firms→innovation and investment in capital good, and specialization allows firms to specialize in different products

Limited Range of Activity/Specialization/Division of Labour

learning by doing, difference in ability, economies of scale, useful only when you can acquire other goods

Absolute Advantage

inputs to produce goods are less than the inputs used by another person/country

Comparative Advantage

Who has the lower opportunity cost

How can capitalism lead to lower living standards?

private property isn’t secure, markets aren’t competitive, firms are owned by the government

Developmental State

A government that leads promoting economic development

Too Big to Fail

companies that have central importance to the government so the government keeps them alive

How can the government destroy market competition?

allowing monopolies and saving Too Big to Fails

Dynamic Capitalism

private incentives, efficient firms, public policy, stable society

Capitalist Revolution

rapid tech improvements, new economic system, created with dynamic capitalism

Thomas Malthus (1766-1834)

there would never be economic prosperity because higher living standards→higher population→food shortage→poverty

General-Purpose Innovation

Tech adavancements that can be applied to many sectors

What inventions broke Malthus’ cycle?

steam engine, spinning wheel, electricity

Economic Models

help see the big picture and focus on key determinants

Flow

a quantity measured per unit of time

Irving Fisher’s Hydraulic Apparatus

cisterns and water demonstrate how prices depend on supply, consumer incomes, and consumer values

Equilibrium

self-perpetuating model outcome, only changed by an external force

Subsistence Level

level of living standards such that a population doesn’t grow or decline

Ceteris Parabus

holds all other variables constant

Economic rents

benefit from option taken-benefit from next best option

Reservation Option

next best alternative

Production Possibilities Frontier

graph that shows the maximum possible output of combonations of two inputs

Isocost Line

represents all combos of technology that cost the same, above is more expensive and below cheaper

Joseph Schumpeter (1883-1950)

emphasized entrepreneurs and creative destruction

Creative Destruction

firms who don’t adopt new tech will die

What is Robert Allen’s explaination for the Industrial Revolution?

it happened in Britain because labour was expensive and coal was cheap

Entrepreneur

Willingness to try new tech

Old Tech

labour-intensive, capital and energy saving

New Tech

capital-intensive, human and time saving

Luddites (1811-1816)

destroyed weaving machinery to protest capitalism

Factors of Production

the inputs in a production process

Average Product

total output/particular input

Production Function

relationship between the number of outputs and number of inputs used

Diminishing Average Product of Labour

when more labour is used in production, average product eventually falls

3 Conditions for the Malthusian Trap

Diminishing Average Product of Labour, rising population in response to increasing wages, absence of big tech improvements to offset DAPL

Two Key Ideas of Malthus’ Model

Law of Diminishing Average Product of Labour, and the population increases when the average product exceeds subsistence (iron model of wages)

Who is best off in a Malthusian world?

Farmers because of high food demand

What didn’t the Malthusian model consider?

Rapid tech progress

Two influences on wages

How much is produced, and the share that is going to workers

Diminishing Returns

When the use of an additional unit of a factor of prodution results in a smaller increase in output than the previous increase

Preferences

A description of the benefit or cost associated with each outcome

Utility

The value one places on an outcome

Marginal Product

The effect of an additional input, and the slope of the production function

Indifference Curve

Curve of points which indicates the combo of goods that can provide the same utility

Properties of an Indifference Curve

Higher IC, higher utility; smooth without gaps; ICs never cross; slope downward

Consumption goods

A good or service that satifies the needs of consumers over a short period

Marginal Rate of Substitution

trade-off a person is willing to make between two goods, and the slop of the Indifference Curve.

Opportunity Cost

taking an action requires forgoing the next best alternative action, net benefit

Economic Cost

the out-of-pocket cost of an action plus the opportunity cost

Feasible Frontier

Curve defining the max feasible quantity of one good for a given quantity of another

Feasible Set

All combos of things under consideration that a decision-maker could choose under certain constraints

Marginal Rate of Transformation

A quantity of some good that must be sacrifieced to acquire an additional unit of another, and the slop of the feasible frontier

Constrained Choice Problem

How we can do the best for ourselves given our preferences and constraints

Social Dilemma

Indpendent choices made by individuals seeking personal gain lead to an outcome that is worse for everyone than if they cooperated

Tradgedy of Commons (Garret Hardin 1968)

Shared resources not owned by anyone tend to be overused unless regulated

Free Ride

Benefiting from the contributions of others to some cooperative project without contributing oneself

Althurism

The willingess to bear a cost in order to benefit somebody else

How can we solve free rides?

Althursim, government policies, local institutions, global policies

Game Theory (Social Interaction)

math that studies strategic interactions, meaning situations in which each actor knows their benefits depend on actions taken by all

Social Interactions

Situations in which the actions taken by each person affect other people’s outcomes and their own

Strategic Interaction (Social Interaction)

Participants are aware in the ways that their action affect others

Stratrgy (Social Interaction)

an action taken by a person who is aware that their own outcome depends not only on their choices but also on the choices of others

Game (Social Interaction)

A model of strategic interaction that describes players, feasible strategies, information that player have, and payoffs

Payoffs

the benefit of each player associated with the joint actions

Best Response

strategy that will give a player the highest payoff, given the other players choice

Dominant Strategy

The action that yields the highest payoff, regardless of what the other player chooses

Dominant Strategy Equilibrium

Outcome where every player plays their dominant strategy

Reciprocity

Preference to be kind and help other who are

Inequality Aversion

A dislike of outcomes where some individuals receive more than others

Prisoners’ Dillema

Two people acting in their own self-interest choose the course of action that results in less payoffs than if they cooperated

Social preferences

Preferences that place a value on what happens to others, even with lower payoff

Zero sum game

payoff gains and losses of individuals sum to zero for all strategy combonations

Public good

Good which use by one person does not reduce the availability to others

Elinor Ostrom (1933-2012)

Common property, open-access resources

Social norm

An understanding that is common to most members of society