Econ Unit 2

Unit 2: Technology, Population and Growth

Using Models to Understand Economic Performance

• Economists use models to simplify and analyze complex economic scenarios.

• Criteria for a Good Model:

  • Clarity

  • Accuracy

  • Usefulness

• Limitations of Models:

  • Abstraction from reality can sometimes oversimplify complex situations.

Application: Understanding Economic Models

• Hockey Stick Diagram:

  • Illustrates real wage stagnation prior to the Industrial Revolution.

• Malthusian Model:

  • Explores factors of production and real wage stagnation.

  • Key concepts:

    • Factors of production

    • Production function

    • Diminishing average product

• Allen's Model of Technological Change:

  • Examines the context of the Industrial Revolution:

    • Factors like economic rents and incentives.

    • Relative prices and isocosts.

    • Role of creative destruction in economic evolution.

Main Themes

• Population and Income Relationship:

  • Investigates how technology influences these aspects.

• Economic Modelling:

  • Discusses finding economic answers through various models.

• Escape from Malthusian Stagnation:

  • Explains how technology transformed the Malthusian trap into dynamic growth.

• Model of a Dynamic Economy:

  • Describes the conditions of the Industrial Revolution.

• Supplementary Material:

  • Video 1 available on Sunlearn relevant to this unit.

Important Concepts

• Key Concepts:

  • Economic models and equilibrium.

  • Ceteris paribus (holding other things constant).

  • Incentives and relative prices.

  • Economic rents and Malthusian economics (limited average product of labor).

History’s Hockey Stick

• Pre-1800 Income Levels:

  • Average incomes remained stagnant remarkably close to subsistence levels.

  • Deterioration in income rates increased mortality rates (younger-age deaths).

• Population Constraints:

  • Families could only provide for basic necessities, limiting population growth.

Economic Models

• Purpose of Economic Models:

  • Abstract from reality to focus on key outcomes.

  • Illustrate how interactions lead to equilibrium and how changes impact this.

• Forms of Models:

  • Verbal, mathematical, or graphical representations.

• Characteristics of Effective Models:

  • Clear, accurate, and provide utility for analysis.

Equilibrium in Economics

• Definition of Equilibrium:

  • A self-perpetuating situation that will not change until an external force acts on it.

• Example in Malthusian Model:

  • Subsistence-level income forms an equilibrium that self-corrects with population increases.

The Need for Economic Models

• Models help comprehend the actions and interactions of millions in an economy.

• They enable economists to:

  • View the big picture.

  • Test theories and causation.

  • Make economic forecasts.

Understanding Malthusian Economics

• Objectives:

  • Analyze stagnant incomes before the Industrial Revolution.

  • Assess the conditions sustaining the Malthusian trap.

  • Explore technology’s role in overcoming stagnation.

  • Critique Malthus’s theories and understand the wage-bargaining power.

  • Video 3 of Unit 2 on Sunlearn enhances comprehension.

Malthusian Model Analysis

• Economic growth remained limited before 1700 due to slow population growth and constant income levels.

• Malthusian Economics Concepts:

  • Population growth retards income, leading back to subsistence living conditions.

  • Agriculture shocks (e.g. potato crop disease) may cause famine but can indirectly benefit the economy under certain circumstances.

Malthus's Key Theories

• Malthus believed advances could not sustain increases in living standards as increased income leads to higher birth rates.

• The 'Malthusian Trap':

  • Growth in income leads to population increases, pressuring resources and decreasing income again.

Malthusian Model Characteristics

• Assumptions:

  1. Diminishing average product of labor.

  2. Population increases when the average product exceeds subsistence.

Revisiting Malthus’s Law

• Malthusian assumptions have been debunked as living standards increased sustainably beyond what he posited.

• Shift in understanding requires a new model for explaining economic evolution, particularly that of the Industrial Revolution.

Model of Innovation: Key Concepts

• Economic Concepts Covered:

  • Ceteris paribus, rational incentives, relative prices, and economic rents all play a crucial role.

1. Understanding Ceteris Paribus**

• Critical tool for isolating factors influencing economic behavior.

• Enables analyses of how changes in one factor affect outcomes while keeping others constant.

2. Rational Incentives**

• Firms focus on maximizing profit, influencing decision-making.

• Cost reduction strategies signify rational actions.

3. Relative Prices**

• Understanding opportunity costs and price ratios helps firms make choices based on resource allocation.

4. Economic Rents**

• Rents depict additional benefits resulting from choices, motivating economic actions.

• Innovators can gain short-term advantages based on technology access.

Summary and Review

• Innovations reshape efficiencies and economic landscapes.

• Malthusian Economics has been rendered incomplete in explaining economic advances due to the occurrence of sustained improvement in living standards post-Industrial Revolution.

Conclusion: Upcoming Units

• Further exploration of economic models will delve into decision-making under constraints, alongside observing responses to technological change.