unit 2 economics

A1S1

Malthusian economics

studying the interaction between population, technology and economic growth

Malthusian model vs Allens model of technological change

MM= understand real wage stagnation before Industrial Revolution ( workers wages after inflation weren’t increasing)

concepts: factors of production, production factors, diminishing average product

Allens= why did the IR happen, where and when

concepts: economic rents and incentives, relative prices, isocosts, creative destruction

what is an equilibrium

A situation that is self perpetuating ( something of interest docent change unless an external force for change is introduced

a state of balance where supply = demand

when is a malthusian model an equilibrium

an income at subsistence level is an equilibrium because movements away from subsistence income are self corrective

In a Malthusian Model, people’s income tends to stay around the subsistence level (just enough to survive).

If things change, they fix themselves:

• If income rises above subsistence → people have more children → population grows → resources per person fall → income goes back down

• If income falls below subsistence → fewer people survive → population shrinks → resources per person rise → income goes back up

In short:
Any move away from subsistence is temporary because population changes push income back to that level.

why do we need models

forecasting

causation

test economic theories

what is stagnation

period where an economy experience little/ no growth

slow increases In output, income and employment

what is the malthusian trap

income growth = population growth = drop in income levels as more pressure on resources

what 2 assumptions does the malthusian model make

production function has a diminishing average product of labour (more farmers = diminishing)

APL= Total product/number of farmers

population increases when average product exceeds subsistence (income growth)

3 ways production functions are expressed

1. table

2. equation

3. figure/ graph

why does APL diminish

more labour on the fixed quantity of land and the land loses value and docent produce as well

do technological improvements help increase the APL

NO- it helps at the beginning to lower the cost and have less labour but then this still brings in income which increases the population and decreases income levels leaving you back at beginning

what conditions required to stay In malthusian trap

diminishing APL
increase in wages= rising population

Without better technology, output per person keeps decreasing over time.

why was Britain able to escape the malthusian trap

because of permanent technological revolution Britain was able to use it and build off of it and wasn’t an issue therefore they escaped

why was malthusian economics debunked?

because Britain and later other countries weren't able to keep a sustained increase in standards of living

what 4 ideas is technological processed on

• ceteris paribus (holding other things constant)

• incentive matters (firms make rational choices)

• relative prices help us compare alternatives

• economic rent

what is ceteris paribus?

when looking at how we as humans make a decisions and their decision makers behaviour we need to determine the factors that go into making a decision and to determine the key decision maker we use ceteris paribus and when looking how one thing changes we keep/ assume the others stay constant

what is incentive matter?

decision makers try to achieve the best possible outcome for themselves

what are relative prices?

RP of something is the ratio of the price of good A to theorise of good B

formula= good A / good B

what is economic rent?

difference between your chosen (best) option and tour reservation option

also called surplus

if economic rent is available= rational economic decision makers will do whatever they can to get it

reservation rent?

next best option to chosen one

if you like chicken over beef and beef over fish

if you get chicken= extra economic benefit

if you get beef = no economic benefit

innovation rent?

the additional profit a firm can make by choosing to use a new technology they reduces costs

if opportunity arrises the business will take it

because many still use old tech price at which output is sold by firm remains high and innovator earns = economic rent/ profit

= price x quantity sold - cost

formula for cost and isocost lines?

(wage x workers) + ( price x quantity)

what does it mean when a technology dominates another?

if it requires less of at least one input and no more of any output

what is an isocost line?

a line that represent all combinations that cost a given amount

formula= wage x labour + price x quantity

slope= - (wage/price)

every point above or to the right of line = higher cost

can be drawn from any cost amount

what do wages depend on?

APL (size of pie)

Workers bargaining power (their share of the pie)