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Core Econ: The Economy Unit 2
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Lecture notes study book The Economy of Core Team, Oxford University Press (Unit 2) - ISBN: 9780198810247 (Summary of Unit 2)
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ECO2004SUNIT 2
TECHNOLOGY, POPULATION AND GROWTH
CORE NOTES
Industrial Revolution
o Complex combination of inter-related intellectual, technological, social,
economic and moral changes
Why did the IR happen?
o High cost of labour
o Low cost of local energy sources
Why did the IR happen in BRITAIN?
o Mokyr: Scientific Revolution and its Enlightenment
o Landes: European countries pulled ahead of China because the Chinese state
was too powerful and stifled innovation
o Clark: cultural attributes such as hard work and savings, which were passed
on to future generations
o Pomeranz: abundance of coal in Britain AND access to agricultural
production in its New World colonies (especially sugar and its by-products)
fed the expanding class of industrial workers
o Other: combination of scientific, demographic, political, geographic and
military factors ; interactions between Europe and the rest of the world too
o No one will agree because it only happened once, which makes it more
difficult to explain
Income Inequality as a result of IR
o Because it originated in Britain, and spread only slowly to the rest of the
world, it also implied a huge increase in income inequality between countries
o Why? One says that we are so rich and they so poor because we are so good and they so
bad; that is, we are hardworking, knowledgeable, educated, well governed, and they are the
reverse . The other says that we are so rich and they so poor because we are so bad and they
so good: we are greedy, ruthless, exploitative, aggressive, while they are weak, innocent,
virtuous, abused, and vulnerable. If you think that IR happened in Europe because of the
Protestant Reformation/Renaissance/scientific revolution/development of private property
rights/ favourable government policies, then you are in the first camp. If you think it
happened because of colonialism/ slavery/demands of constant warfare, then you are not
How models are used in economics (Fisher’s plan)
1. Built a model to capture the elements of the economy that he thought
mattered for the determination of prices.
2. Then used the model to show how interactions between these elements
could result in a set of prices that did not change.
3. Finally conducted experiments with the model to discover the effects of
changes in economic conditions (eg: if the supply of one of the goods
, ECO2004S
increased, what would happen to its price? What would happen to the prices
of all of the other goods?)
Concept of Equilibrium
o A model outcome that is self-perpetuating.
o In this case, something of interest does not change unless an outside or
external force is introduced that alters the model’s description of the
situation.
o An income at subsistence level is an equilibrium because movements away
from subsistence income are self-correcting: they automatically lead back to
subsistence income as population rises.
o Equilibrium means that one or more things in the model are constant. BUT it
does not need to mean that nothing changes. For example, we might see an
equilibrium in which GDP or prices are increasing, but at a constant rate.
Steps to build an economic model
1. Construct a simplified description of the conditions under which people take
actions.
2. Describe in simple terms what determines the actions that people take.
3. Determine how each of their actions affects each other.
4. Determine outcome of these actions. (often an equilibrium - something is
constant).
5. Finally, try to get more insight by studying what happens to certain variables
when conditions change.
Attributes of a good model
It is clear: It helps us better understand something important.
It predicts accurately: Its predictions are consistent with evidence.
It improves communication: It helps us to understand what we agree (and
disagree) about.
It is useful: We can use it to find ways to improve how the economy works.
4 key ideas of economic modelling:
o Ceteris paribus: In an economic model it means an analysis ‘holds other
things constant’
help us focus on the variables of interest.
o Incentives: Economic reward or punishment, which influences the benefits
and costs of alternative courses of action.
affect the benefits and costs of taking one action as opposed to another.
o Relative price: The price of one good or service compared to another
help us compare alternatives
o Economic rent: payment or other benefit received above and beyond what
the individual would have received in his or her next best alternative (or
reservation option).
basis of how people make choices
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