ECC 1000 Topic 2

What problem did Zhang Daili's original firm, Redcollar, face in the tailoring industry?

Intense competition, low prices, and thin profit margins due to low entry barriers.

What innovation did Kutesmart introduce in 2014 for tailoring suits?

Affordable, made-to-measure suits using automated technology.

What technologies did Kutesmart use to collect body measurements?

Sensor-equipped leotards and light beam machines.

How did Kutesmart's innovations impact labor time for making suits?

Labor time dropped to 1/20th of traditional methods.

What was the effect of Kutesmart's innovations on the cost of custom suits?

Costs fell dramatically, making custom suits cheaper than off-the-rack ones.

By what year were Kutesmart's revenues doubling annually?

By 2016.

What key insight does Kutesmart's model illustrate about traditional industries?

Automation and digital innovation can transform traditional industries, making luxury products accessible and scalable.

What major historical event does the Industrial Revolution represent?

A major shift in economic development in 18th-century Britain.

What was one of the key technological advancements in textiles during the Industrial Revolution?

The flying shuttle, which increased weaving speed.

How did Britain's coal reserves impact productivity during the Industrial Revolution?

They replaced traditional energy sources, enabling massive productivity gains but also introducing environmental costs.

What was the Malthusian Trap, and how was it broken after the Industrial Revolution?

Population growth offset productivity gains, but post-1830, technology improved fast enough to outpace population growth, allowing real wages to rise.

What evidence indicates the escape from the Malthusian Trap?

Real wages of skilled workers in London remained flat for centuries but rose sharply after 1830 alongside population growth.

What demographic change occurred by the 1870s as a result of rising incomes?

Smaller family sizes, supporting sustained improvements in living standards.

What decision-making framework do people use when making economic choices?

Weighing costs and benefits of available options.

What is opportunity cost?

The value of the next best alternative that is forgone when a choice is made.

How is economic cost defined?

The total cost of an action, including both direct costs and opportunity costs.

What is economic rent?

The extra benefit received from choosing the best option over the next best alternative.

What decision rule should individuals follow according to economic principles?

Choose the option with the highest net benefit or take the action if the benefit exceeds the economic cost.

Why are the concepts of opportunity cost and economic rent important?

They help explain how individuals, firms, and governments make choices and are foundational for understanding incentives and resource allocation.

How is economic rent calculated?

Economic Rent = Net Benefit from Chosen Option - Net Benefit from Next Best Option.

Provide an example of economic rent.

If the concert gives a net benefit of $30 and babysitting gives $22, the economic rent is $8.

What is the decision rule using economic rent?

Take an action if it gives you a positive economic rent and continue as long as the rent remains positive or zero.

What is innovation rent?

Innovation rent is the extra profit from using a new technology or method that competitors can't replicate.

How is innovation rent calculated?

Innovation Rent = Profit with New Technology - Profit with Old Technology.

What motivates innovation in economics?

Economic rents motivate innovation and drive economic progress.

What are incentives in economic terms?

Incentives are rewards or penalties that influence decisions.

How do relative prices influence economic decisions?

Relative prices shape choices in production and consumption.

What historical example illustrates the impact of relative prices on technology adoption?

During the Industrial Revolution, the low price of coal relative to wages encouraged firms to adopt labour-saving technologies.

What is comparative advantage?

Comparative advantage is when countries or individuals specialize in producing goods they can produce more efficiently relative to others.

What is specialization in economics?

Specialization is focusing on a narrow range of tasks or products to increase productivity.

What are the benefits of specialization?

Benefits include learning by doing, differences in ability or resources, and economies of scale.

What is division of labor?

Division of labor is when tasks are split among individuals, firms, or countries to maximize efficiency and output.

What historical shift occurred in global production from 1600 to 1900?

Asia led global manufacturing in 1600, but by 1900, Europe and its colonies dominated manufacturing.

How did markets facilitate economic growth?

Markets connect producers and consumers across regions, enabling specialization.

Provide modern examples of specialization.

Cambodia specializes in gold and knitwear; Singapore specializes in integrated circuits.

What is the key idea behind comparative advantage?

It explains how individuals, firms, or countries can benefit from specializing and trading, even if one party is better at producing everything.

Who are Greta and Carlos in the context of comparative advantage?

Greta is more productive than Carlos in both apples and wheat, but Carlos has a comparative advantage in apples.

What are the opportunity costs for Greta and Carlos?

Greta: 1 ton of wheat = 25 apples; Carlos: 1 ton of wheat = 50 apples.

What are the gains from specialization and trade?

Under specialization, Greta produces only wheat and Carlos only apples, leading to increased consumption of both goods through trade.

What principle underpins much of global trade and economic cooperation?

The principle of comparative advantage.

What is the challenge of specialization in a complex economy?

Individuals and firms specialize in producing a few goods but consume many, creating a need for efficient distribution systems.

How do markets solve the distribution problem in an economy?

Markets enable trade, allowing people to benefit from comparative advantage and specialization.

What did Adam Smith argue about the extent of the market and the division of labour?

Smith argued that larger markets encourage specialization by making trade more feasible, while small markets discourage it.

How does specialization occur within firms?

Specialization occurs within firms by dividing tasks among workers to produce complex goods efficiently.

What is a production function?

A production function describes the relationship between inputs (labour, materials, machines, energy) and output.

What does the production function Y=f(M,N,E) represent in olive oil production?

Y represents litres of oil produced, M is the number of machines, N is the number of workers, and E is the energy used.

What is fixed-proportions technology?

A technology where inputs must be used in fixed ratios, exhibiting constant returns to scale.

What are the characteristics of Technology A in olive oil production?

Technology A requires 2 workers and 160 kWh to produce 100 litres of olive oil, with an average product of labour of 50 litres per worker.

What are the characteristics of Technology B in olive oil production?

Technology B requires 1 worker and 400 kWh to produce 100 litres of olive oil, with an average product of labour of 100 litres per worker.

What is the trade-off between Technology A and Technology B in olive oil production?

Technology B is more labour-efficient but much more energy-intensive; the choice depends on the relative costs of labour and energy.

What does it mean for a technology to have constant returns to scale?

It means that doubling all inputs will double the output.

Why is understanding production functions important?

It helps explain how firms scale, choose technologies, and respond to economic incentives.

What role do markets and firms play in productivity and economic growth?

Markets and firms together enable higher productivity and economic growth through specialization.

What is the impact of specialization on families, governments, and societies?

Specialization occurs not just in firms but also in families, governments, and societies, contributing to overall economic efficiency.

How did technology choices during the Industrial Revolution relate to olive oil production?

The trade-off between labour and energy costs influenced technology choices, a concept that remains relevant today.

What is the average product of labour for Technology B in olive oil production?

100 litres per worker.

What is the energy-labour ratio for Technology A?

80 kWh per worker.

What is the energy-labour ratio for Technology B?

400 kWh per worker.

What does the term 'unintended cooperation' refer to in the context of markets?

It refers to how individuals work toward their own goals while contributing to a larger system of production and exchange.

What is the significance of the division of labour according to Adam Smith?

The division of labour increases efficiency and productivity by allowing workers to specialize in specific tasks.

What is an example of internal specialization within a firm?

Kutesmart split tailoring into 300 specialized operations using technology.

What powered the labour-saving technologies during the Industrial Revolution?

Coal

What are the two main factors firms consider when choosing technology?

Input requirements and costs.

What are the characteristics of the five technologies (A to E) for producing cloth?

They have fixed proportions of inputs and constant returns to scale.

Which technology is the most energy-intensive?

Technology A, which requires 1 worker and 6 tons of coal.

Which technology is the most labour-intensive?

Technology E, which requires 10 workers and 1 ton of coal.

What happens to technologies C and D in the comparison?

They are dominated and not chosen because they use more of both inputs than alternatives.

What is the primary goal of firms when choosing technology?

To minimize costs and maximize profits.

When should a firm choose labour-intensive technology?

When labour is cheap.

When should a firm choose energy-intensive technology?

When coal is cheap.

What formula do firms use to calculate production costs?

Cost = (w × N) + (p × R), where w is wage per worker, N is number of workers, p is price per ton of coal, and R is tons of coal used.

What does an isocost line represent?

All combinations of inputs (labour and coal) that result in the same total cost.

If w = £10 and p = £20, what is an example of a combination that lies on the same isocost line?

2 workers + 3 tons of coal = £80.

What does the slope of an isocost line reflect?

The relative prices of inputs.

What is the cheapest technology option when comparing costs?

Technology B at £80.

How do changing input prices affect technology choices?

They alter the slope of isocost lines, affecting which technology is cheapest.

What happens to the least-cost technology when coal price drops to £5?

Technology A becomes the least-cost option.

What is the profit gain from switching to Technology A when coal becomes cheaper?

£10, calculated as £50 (previous cost) - £40 (new cost).

What is the term for the extra profit gained from adopting a more efficient technology?

Innovation rent.

Who is referred to as an entrepreneur in the context of technology adoption?

The first firm to adopt the new technology.

What historical insight is drawn from the changes in coal prices during the Industrial Revolution?

Falling coal prices incentivized firms to adopt labour-saving, energy-intensive technologies, leading to higher productivity and profits.

What was a key insight regarding technology adoption during the Industrial Revolution?

It was driven by economic incentives, especially the relative cost of labour versus energy.

What are Schumpeterian rents?

Economic profits earned by entrepreneurs from innovation, named after economist Joseph Schumpeter.

What happens to firms when new technology is adopted in a market?

Other firms notice the profit advantage, adopt the new technology, increasing supply and causing prices to fall.

What is the process of creative destruction?

A process where old technologies and firms are replaced by new ones, reallocating resources to more productive uses and driving economic progress.

Why do economists use models?

To simplify and focus on key elements of the economy, highlighting essential features while ignoring irrelevant details.

What are the different types of economic models?

Models can be expressed in words, numbers, graphs, or equations, such as opportunity cost models and Malthusian models.

What is the significance of Irving Fisher's Hydraulic Model?

It simulated how prices are determined by supply, income, and consumer preferences, demonstrating economic equilibrium.

What is equilibrium in economic models?

A stable state where variables do not change unless influenced by external forces.

What are endogenous and exogenous variables?

Endogenous variables are determined within the model (e.g., population, prices), while exogenous variables are set outside the model (e.g., technology level).

What does ceteris paribus mean in economic modeling?

It is a Latin phrase meaning 'other things equal,' used to hold other factors constant in a model.

How does the Malthusian model simplify analysis?

It assumes labor force size is proportional to population, ignoring other influences to clarify the link between population and living standards.

What makes a good economic model?

A good model explains a specific aspect of the economy, is consistent with evidence, and has clear assumptions.

What is a limitation of the Malthusian model?

It explains stagnant living standards despite technological progress but does not explain why technology improved.

What are the steps in model-building?

Define a clear question, simplify conditions, describe driving actions, show interactions, determine outcomes, and study changes.

How are models tested in economics?

By generating predictions based on assumptions and comparing them with real-world data to validate or refine the model.

What role do models play for policymakers and businesses?

Models help inform decisions, but bad models can lead to poor outcomes.

What is the impact of innovation on outdated firms?

Firms using outdated technology may go bankrupt as innovation rents disappear.

What is the relationship between technology adoption and economic progress?

Adoption of new technology leads to increased supply, lower prices, and ultimately economic renewal.

How do models help in understanding complex economic phenomena?

By isolating important factors and simplifying reality to focus on key relationships.