ECON10010 - Principles of Microeconomics

What has driven rapid economic growth since the 1800s?

Largely driven by technical innovation.

What is the Malthusian Trap?

A concept by Thomas Robert Malthus that suggests population growth will outpace agricultural production, leading to lower living standards.

What does the Malthusian Model assume about the economy?

It considers an agriculture-only economy with fixed land supply.

How does technical innovation affect agricultural output according to the Malthusian Model?

It can increase agricultural output, but initial gains in output per person are lost due to population growth.

What are the key pieces of evidence supporting the Malthusian view?

1. Plagues reduce population sizes, improving living standards (wages). 2. Population growth erodes gains. 3. Innovation improves output. 4. Population growth again erodes gains.

What is the impact of industrialization on CO2 emissions?

Industrialization results in a large increase in CO2 emissions, contributing to global temperature increases.

What are the consequences of increased global temperatures due to industrialization?

It damages Earth's zones of habitation and cultivation.

What does the Continuous Technological Revolution involve?

It involves greater production through technological innovation, increased capital inputs versus labor, and a shift from artisans to factory workers.

What role did international trade and colonization play in the industrial revolution?

They were involved in the production of raw commodities like cotton and sugar, often produced by slave labor.

What energy sources did the industrial revolution rely on?

Geologically stored sources of energy such as coal and later oil.

How did the industrial revolution affect the Malthusian trap?

It fundamentally broke the constraints of the Malthusian trap through ongoing productivity growth and eventually falling fertility rates.

What is the significance of opportunity costs in economics?

Opportunity costs represent the benefits lost when choosing one alternative over another.

What is economic rent?

Economic rent refers to the excess payment made to a factor of production over and above what is necessary to keep it in its current use.

What is comparative advantage?

The ability of a party to produce a particular good or service at a lower opportunity cost than another party.

What is specialization in economics?

The process by which individuals or groups focus on a limited scope of production to gain greater efficiency.

What are gains from trade?

The benefits that parties receive from engaging in trade, typically resulting from comparative advantage.

What are basic production functions?

Mathematical representations that describe the relationship between inputs and outputs in production.

What are isocost curves?

Curves that represent all combinations of inputs that yield the same total cost.

How did the industrial revolution change the input mix?

It fundamentally changed the mix of capital and labor.

What environmental impact did the industrial revolution have?

It greatly increased CO2 emissions.

What framework do people use to make economic decisions?

They consider the costs and benefits to them.

What types of costs and benefits are considered in economic decisions?

Explicit financial costs and benefits.

What is net benefit?

The value of something net of the costs of availing of it, calculated as value of enjoyment minus cost.

How is net benefit calculated for attending a concert?

Net benefit of concert = value of enjoyment (€55) - cost of ticket (€25) = €30.

How is economic cost defined?

Economic cost = direct costs + opportunity costs.

What is an example of opportunity cost related to attending university?

Foregone earnings, as you could be earning money instead of attending university.

What does positive economic rent indicate?

It means the course of action is beneficial.

What are the three primary reasons for specialization?

1. Learning by doing 2. Difference in ability 3. Economies of scale.

What is absolute advantage?

The ability to produce more of a good than another producer.

What is the implication of specialization at multiple levels?

Specialization applies to individuals, firms, and countries, enhancing efficiency.

What is the relationship between net benefit and opportunity cost?

The difference in net benefit between options equals the benefit minus opportunity cost.

What is the significance of economic actors seeking to maximize their rents?

It refers to rent-seeking behavior in an economic context.

What are the implications of labor market conditions for education duration?

They influence decisions on when and how long to study.

What does the production possibilities frontier for Greta and Carlos illustrate?

It shows their production choices and the potential gains from trade.

What do the red and blue points on the production possibilities frontier represent?

They represent self-sufficient production and consumption choices for Greta and Carlos.

What does the purple point on the production possibilities frontier indicate?

It indicates the total combined consumption from self-sufficiency.

What is the significance of the red and blue squares on the production possibilities frontier?

They mark the positions of complete specialized production based on comparative advantage.

What does the purple triangle represent in the context of production?

It represents the total combined production when Greta and Carlos specialize.

How do the consumption choices marked with red and blue triangles differ from self-sufficient points?

They dominate the self-sufficient consumption points, indicating improved consumption possibilities.

What does the purple line on the production possibilities frontier represent?

It represents the complete production possibilities frontier with trade.

What is a key implication of gains from trade according to the notes?

Both parties benefit from trade, even those with an absolute disadvantage.

What are the factors of production mentioned in the notes?

Labour, land, capital (machinery), and raw materials.

What does a production function describe?

It describes how factors of production are combined to yield output.

What is the general form of a production function provided in the notes?

Y=f(L,K,E), where L is labour, K is capital, and E is energy.

What are the properties of the two example production functions compared?

They have fixed proportion technologies and constant returns to scale (CRS).

How can we determine which production function is most efficient?

By considering the input costs associated with each function.

What does the concept of dominance allow us to do in comparing technologies?

It allows us to rule out less efficient technologies based on their input requirements.

What is the cost function for a firm as described in the notes?

Cost = wage x employees + price of coal x quantity of coal used.

What do the variables w, N, p, and R represent in the cost function?

w is the wage rate, N is the number of workers, p is the price per unit of coal, and R is the units of coal used.

What is the relationship between production functions and technology?

A production function describes how technology combines inputs to yield output.

What is the focus of the analysis regarding energy in production functions?

The analysis emphasizes energy, contrasting with conventional textbooks that focus on capital.

What is the outcome of specialization and trade for living standards?

It explains much of the benefits of specialization in terms of improving living standards.

What happens to the slope of the isocost line if the cost of coal falls from £20 to £5?

The slope becomes steeper.

How does the optimal mix of inputs change with lower coal prices?

It shifts from a labour-intensive process to an energy-intensive process.

What is the relationship between adopting new technology and profits?

Adopting lower cost technology can increase profits.

What is the formula for profit?

Profit = revenue - costs.

What happens to innovation rents as more firms adopt new technology?

Competition pushes sales prices down, reducing revenues and competing away the innovation rent.

What is 'creative destruction' according to Joseph Schumpeter?

It's the process where firms that do not adopt new low-cost production may close due to inability to compete.

What is a key consideration in economic decision making?

Opportunity costs.

What can be anticipated from changing input prices?

The consequences for optimal technologies in terms of input mix.

What is the main theme of the lecture on scarcity?

People make choices under scarcity and attempt to maximize their wellbeing by making trade-offs.

What happens to working hours as wages increase, according to the lecture?

Increased wages are associated with reduced working hours.

What is the relationship between wealthier countries and leisure time?

Wealthier countries appear to consume more leisure time.

What is the linear function that models Karim's income?

Karim's income is modeled as y=wh, where y is income, w is wage, and h is hours worked.

What does the slope of Karim's income function represent?

The slope of the line equals his wage.

What are indifference curves used to represent?

Indifference curves represent preferences for consumption and leisure.

What does a higher indifference curve indicate?

Higher curves correspond with higher utility.

What is the Marginal Rate of Substitution (MRS)?

The MRS is the rate at which one good is sacrificed to gain one unit of another while keeping utility constant.

How does the MRS change at different points on the indifference curve?

The MRS is high when consumption is high and leisure is low, and low when consumption is low and leisure is high.

What is the opportunity cost of leisure time for Karim?

Leisure time has the opportunity cost of foregone earnings and thus consumption.

What does Karim's budget constraint represent?

Karim's budget constraint represents the trade-off between consumption and leisure time.

What is the equation for Karim's consumption based on his time endowment?

c=w(24-t), where c is consumption, t is hours of free time, and w is the wage.

What does the slope of the budget constraint represent?

The slope of the budget constraint represents the Marginal Rate of Transformation (MRT).

Why can indifference curves never cross?

If they crossed, it would imply that two combinations have the same utility, which violates the property of transitivity.

What is the implication of a combination being on a higher indifference curve?

It implies a higher level of utility compared to combinations on lower curves.

What does the term 'convex preferences' refer to in the context of indifference curves?

It refers to the typical shape of indifference curves being convex to the origin, indicating a preference for mixed consumption.

What is the significance of the plateau observed in hours worked?

It indicates that despite increased wages, there is a limit to the number of hours people are willing to work.

What is the role of preferences in Karim's decision-making?

Karim's preferences help determine his optimal trade-off between consumption and leisure.

What are the effects of increased income on consumption choices?

Increased income may lead to a willingness to spend more on labor-saving services and changes in holiday choices.

What does the feasible set represent in the context of the budget constraint?

The feasible set includes all combinations of consumption and leisure that are attainable given the budget constraint.

What is the relationship between the slope of the budget constraint and the wage rate?

The slope of the budget constraint equals the negative of Karim's wage, indicating the trade-off rate between leisure and consumption.

What is the purpose of mapping preferences with indifference curves?

To visualize the trade-offs between consumption and leisure and to determine optimal choices.

What does the term 'diminishing marginal utility' imply in the context of preferences?

It implies that as a person consumes more of one good, the additional satisfaction gained from consuming more of that good decreases.

What is the significance of the industrial revolution on wages and working hours?

Wages increased dramatically following the industrial revolution, leading to more leisure consumption despite higher wage rates.

What is the marginal rate of substitution (MRS)?

The rate of one good that will be sacrificed to gain one unit of another to keep utility constant.

What does the labour-leisure model explain regarding hours worked during the industrial revolution?

It explains the increase and subsequent decrease in hours worked as living standards rose.

How have average working hours in high-income countries changed over the past 150 years?

They have generally fallen.

What is conspicuous consumption according to Thorstein Veblen?

The consumption of goods not just to meet basic needs, but also to signal social status.

How does income inequality relate to working hours?

Veblen effects suggest that people may work more in societies with less even income distributions.

What is the impact of unpaid work on gender differences in labour?

Women typically do less paid work and more unpaid work, contributing to differences in working hours.

What is the budget constraint for a two-income household with equal preferences and wages?

c = w(34 - t), where c is consumption, w is wage, and t is non-working time.

What happens to Ana and Luis's work distribution if Ana faces wage discrimination?

Ana earns less, leading to a lower utility for the household, with Luis doing more paid work and Ana doing more unpaid work.

How can the model explain international differences in working hours?

Differences in working hours can be attributed to differences in wages or preferences.

What is the significance of the MRS at points A and H in the context of consumption and leisure?

At point A, the MRS is high (€94/hour) indicating high consumption and low leisure, while at point H, it is low (€32/hour) indicating low consumption and high leisure.

How does the model address the adequacy of preferences in economic analysis?

It suggests that preferences may not be fixed and can be influenced by social factors.

What is the role of the income effect in the context of working hours?

As wages increase and living standards rise, the income effect can lead to a preference for more leisure and less work.

What is the relationship between Veblen effects and income distribution?

Veblen effects suggest that conspicuous consumption can lead to increased work in societies with greater income inequality.

What does the data suggest about working hours in the US compared to the Netherlands?

The fall in working hours is less pronounced in the US compared to the Netherlands.

What is the implication of the model for understanding gender wage differences?

Differences in wages do not fully explain the differences in working hours between men and women.

What does the model suggest about the consumption patterns in Australia versus the Netherlands?

Assuming the same preferences, an increase in wages would lead to ambiguous changes in working hours and an unambiguous increase in consumption.