Unit 1 & 2 Flashcards
(8 cards)
What is the general trend in living standards for most countries over the past centuries?
Most countries have a hockey-stick shaped growth in gdp per capita on a graph with gdp per capita on the y axis and year/time on the x axis.
For all countries the shape is different and some kinks are more abrupt than others.
Some countries haven’t taken off yet.
For Britain it started during the Industrial Revolution.
What is the trend in carbon dioxide emissions over the past centuries?
Hockey stick shape with emissions being 0 until the Industrial Revolution and then rapid increase
What has been the trend in global poverty and income inequality between and within countries over the past couple of centuries?
Global extreme poverty has declined massively over the past 200 years.
Income inequality within countries has widened over the years.
Income inequality between countries has increased since before the Industrial Revolution. Countries that took off earlier (ie 1900) like Britain, japan and Italy are now rich and developed whilst countries that took off recently are poorer.
What is the model of production?
Assume an agricultural economy produces one good, grain. Grain production involves only labour and land as factors of production.
Assume the quantity of land is fixed.
If employment increases, there will be more workers on the fixed quantity of land so average output per worker will decline/average product of labour diminishes.
Average product of labour = total output/total labour
The production function is the relationship between the inputs and outputs (Y=f(X))
On a graph with grain produced on y axis and no. Of farmers on x axis, the production function for this economy is a concave curve, showing that average product of labour diminishes as employment rises.
What is the Malthusian trap?
This combines two important assumptions:
- as employment increases average product of labour diminishes
- population expands if living standards increase
Suppose initially living standards are low.
Agricultural technology improves.
Average output per farmer increases.
Living standards increase (more grain per person)
Population increases.
More workers so less land per farmer.
Average product of labour falls.
Less grain per person.
Population is larger but living standards revert back to original level.
So although incomes may fluctuate year to year, there is no permanent upwards trend.
This explains the flat part of the hockey stick.
How can the Malthusian model be graphed?
Average product of labour on the y axis and number of farmers (population) on the x axis.
There is a subsistence income level (the level of living standards below which the population declines)
The curve is downwards sloping and shows the average product of labour.
When APL is above the subsistence level, population rises and so APL falls.
When APL is below subsistence level, population falls and APL rises.
If productivity were to rise, the APL curve shifts upwards. Initially at the original population level, APL rises, but because income is above the subsistence level, APL falls (rightward movement) back to the subsistence level but now at a higher population.
What is opportunity cost, reservation option, economic cost and economic rent?
Opportunity Cost: the value of the next best alternative forgone
Reservation option: the next best alternative when making a choice
Economic cost = direct cost of taking an action (ie monetary or cost of effort) + opportunity cost
An individual will choose an action if the benefit is greater than the economic cost
Economic rent: net benefit of taking an action minus opportunity cost
An individual will choose an action if it gives them an employment rent (ie net benefit outweighs opportunity cost)
What are isocost lines?
Lines the represent all the combinations of inputs that equate to the same cost for the firm.
Isocost lines are parallel. Higher isocost lines represent higher cost to the firm.
Suppose a firm has two inputs, labour and a commodity, ie coal.
Units of coal are on y axis, number of workers on x axis.
The cost of labour is wage, w and cost of coal is its price, p.
Total cost = (wage x workers) + ( price of coal x units of coal) = wN+pR
Slope of the isocost lines represent = -w/p
If the relative price of coal becomes cheaper, ie w/p increases, so the isocost line becomes more steep because for every given number of workers, the firm can use more coal.
