Econ 200: Technology and Incentives

Rational Decision Making

• Model assumes decision makers choose options that maximize net benefit.

  • Net Benefit: Benefit - Economic Cost (also known as Economic Rent).

  • Economic decisions often involve trade-offs; hence, we must account for the Opportunity Cost.

  • Opportunity Cost: Value of the next best alternative that is given up.

Economic Cost

• Calculation of Economic Cost:

  • Economic cost = Direct Costs + Opportunity Cost

  • Economic Rent: Net benefit from chosen option - Opportunity Cost.

  • Example:

    • Attending Husky football game:

    • Benefits: $120

    • Costs (tickets): $88

    • Opportunity cost (concert): $40

    • Economic Rent = $120 - $88 - $40 = -$8

    • Analyze alternatives such as concert or Husky season tickets.

Technological Revolution

• Technology: Processes that convert inputs (materials, labor) into outputs.

  • Technological progress results in reduced labor for the same output.

  • Historically slow until the Industrial Revolution, which triggered a permanent technological revolution.

• Incentives for Technology: Firms propel technological advancements to remain competitive.

  • Specialization: Growth of firms and markets enable division of labor, leading to improved living standards.

  • Attributed to Adam Smith.

Adam Smith's Contributions

• Noted as the father of economics.

• Major works include:

  • "The Theory of Moral Sentiments"

  • "An Inquiry into the Nature and Causes of the Wealth of Nations"

• Famous for promoting the idea of self-interest benefiting society through an Invisible Hand.

  • Smith's Quote: "By directing that industry… led by an invisible hand to promote an end which was no part of his intention."

Gains from Specialization

• Productivity increases when individuals focus on specific activities due to:

  • Learning by doing

  • Difference in skills/resources

  • Economies of scale

• Specialization requires market access for acquiring necessary goods.

Production Functions

• Defines relationship between inputs and outputs.

• Example: Greta vs. Carlos in producing apples and wheat.

  • Produce 100% time in apples:

  • Greta: 1,250 apples

  • Carlos: 1,000 apples

  • Produce 100% time in wheat:

  • Greta: 50 tons

  • Carlos: 20 tons

• Absolute Advantage: Higher productivity in good production.

  • Identify who has advantage in apples and wheat.

Opportunity Cost and Comparative Advantage

• Opportunity Costs for Greta and Carlos:

  • Greta: 15 apples per ton of wheat; 0.04 tons per apple.

  • Carlos: 50 apples per ton of wheat; 0.02 tons per apple.

• Comparative advantage identified when one has lower opportunity costs relative to another.

Gains from Trade

• Self-Sufficiency:

  • Greta: 40% on apples, 60% on wheat.

  • Carlos: 30% on apples, 70% on wheat.

  • Output Calculation:

  • Greta: 500 apples, 30 tons wheat.

  • Carlos: 300 apples, 14 tons wheat.

  • Total: 800 apples, 44 tons wheat.

• With specialization, (focusing on one good) allows increased efficiency and output.

Example of Trade Benefits

• Specialization benefits increase overall apples and wheat without detriment to either party.

• Total with Trade:

  • Greta: 600 apples, 35 tons wheat.

  • Carlos: 400 apples, 15 tons wheat.

  • Each gains significantly in goods exchanged.

Global Trade Benefits

• Explains why countries specialize in certain goods based on several factors: technology, resources, etc.

Historical Technological Progress

• Highlights various forms of technologies over time:

  • Fire, candles, whale oil lamps to modern lightbulbs.

Capitalism Defined

• Characteristics:

  • Private property, markets, firms.

• Even capitalist economies include non-capitalist institutions (families, governments).

• Distinction between capitalism and democracy; capitalist economies can exist independently of democratic governance.

Economics and Gender

• Noteworthy commentary on gendered labor and its exclusion from economic models (e.g., domestic labor often unmeasured).