intro micro units 1 and 2

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empirical/positivist approach

seeks economic answers based on data and research

qualitative/normative approach

seeks how an economy should theoretically work

orthodox economics

economics based on established, accepted thinking

heterodox economics

economics based on anything that isn’t orthodox

institutions

systems of established and prevalent social rules that structure social interaction

asymmetric information

when, in a transaction, one party knows more than the other

incomplete contract

a contract where the terms cannot clearly be enforced

examples of capitalist institutions

private property, markets, and firms/corporations that seek profit

private property

right to benefit from, exchange, or exclude others from a possession

markets

system of interpersonal + reciprocal changes of goods and services with stated prices and rules.

firm/corporation

legal entity that allows owners to pool capital to organize production for profit

gross domestic product (gdp)

total output of good and services in an economy

purchasing power parity

a metric used to measure economic productivity and standard of living between countries

what caused explosive economic growth worldwide?

technological advancements, e.g. industrial revolution in britain

technology in economics

socially coordinating around technological advancements to create economic growth

production function

a way to formalize a technology and its output

cobb-douglas specification

y = A(L^(alpha) N^(beta))

Y in the cobb-douglas specification

output

A in the cobb-douglas specification

technology scalar

alpha + beta =

1

average product

Y/L

marginal product

change in Y / change in L

gdp per capita

Y / population

constant return to scale

change in input causes a proportional change in output, e.g. 2x input → 2x output

increasing/decreasing return to scale

change in input causes disproportional change in output, e.g. 3x input → ½ output

malthusian trap

idea that humanity is trapped in a cycle of population growth → reduction in gdp per capita/resources for humanity → people die → increase in gdp per capita → cycle continues

how to escape the malthusian trap

technological advancement matches or exceeds population growth

veil of economics

market appears impersonal, but it is in fact created and regulated by society

freedom in the double sense

freedom to do whatever you want, including not working → starving

circuit of commodities

producers create commodity for consumption (C) or trade it for money (M) which is used to buy more commodities (C’)

circuit of commodities order

C → M → C’

circuit of capital

money (M) is invested to create commodities (C) which are traded for more money (M’)

circuit of capital order

M → C → M’

what compels institutions to evolve technologically?

race for profit

what does the circuit of capital rely on

institutions of capitalism, to facilitate production + profit

lewis model

an economy with subsistence and capitalist sectors, w/ labor being drawn to capitalist sectors bc of productivity and dynamicism.

marginalism

idea that economic choices are based on incremental units rather than categorical units

utilitarian calculus

a way to measure the value associated w/ actions; major effect on economic choices

opportunity cost

value of explicit and implicit costs

explicit cost

amount of money it took to perform a choice

implicit cost

value of the next best option

accounting

cost + benefit of an action solely based on explicit costs

economic return

cost + benefit of an action considering all implicit costs

economic cost/reservation option

explicit + opportunity cost

willingness to pay

utility value of all possible benefits

sunk cost

something you’ve paid for; can’t get the money back

marginal cost

cost of producing/adding 1 more unit of item

economic rent

(net benefit) - (opportunity cost)

comparative advantage

having lower opportunity cost in producing a good/service

absolute advantage

being able to produce more of a good/service

valuation

based on utility/profit received based on an action or choice

net benefit

(percieved benefit) - (opportunity cost)

relative price/incentive

the price of a good/service relative to another good/service

fixed proportion technology

in order to increase output, all inputs must increase proportionally

technology dominance

one technology’s input-intensity being superior to that of another technology

isocost line

graphical representation of all combinations of factor inputs equal to a total given cost

isocost line formula

C = wN + pE