NOTES MICEC
WEEK 0 – The capitalist revolution
1700 – industrialisation and innovation leading to a better standard of living, associated with the
emergence of the economic system called capitalism (private property, markets and firms important)
-increased labour productivity, but at the cost of our environment and inequality, great divergence
Since 1980 within country inequality has increased. Historically rich countries which took off are still
the rich countries today (Allen).
Measuring the worth of production within a country (GDP) can be done by looking at the
accumulated income of everyone in that country. GDP per capita does not capture inequalities within
countries, not always a good measure, but does encompass goods produced by the government,
collective goods. Disposable income: someone’s income after taxes and transfers. It measures what a
person can buy without borrowing. However, wellbeing is influenced by more than just our income,
social life, clean environment, healthcare and education etc. Income distribution also affects
wellbeing, so average disposable income is not as good as average wellbeing.
Growth rate = change in income/original level of income, we can compare growth rates by a ratio
scale. For a long time, living standards remained constant and sustained growth happened at
different times in different countries, leading to big differences in living standards around the world.
Industrial revolution in Britain obviously. Developing new technologies, processes that take a set of
materials and other inputs and create an output. Technological progress made everything faster and
easier, leading to a technological revolution. This eventually lead to globalisation.
People interact with their environment and each other to create their living, meaning the economy is
part of our physical environment and society. People have always just taken as many natural
resources as needed, not looking at the effects on their environment. Producing, selling and making a
livelihood is done within the biosphere and thus influences it.
Terminology
Derivative the afgeleide of a function
GDP (per capita) Gross Domestic Product is the value of
everything produced within a country in a
certain time period, per capita is divided over
the number of inhabitants.
Disposable income income after taxes and transfers
Capitalism a system in which private property, markets and
firms are important
Economic system the institutions which influence production and
distribution of goods and services
Institutions laws, social customs, places enforcing these –
the rules which constrain and stimulate human
behaviour.
Capital goods the equipment’s used in producing goods and
services, also intellectual property
Economies of scale an increase in inputs leads to a bigger increase
in outputs, more production leads to a lower
production cost per product. Also diseconomies
, of scale.
Absolute advantage Being able to produce something more
efficient, leading to comparative advantage
Developmental state a government promoting innovation and
economic development
Technology, population and growth
Malthusian trap, vicious circle of poverty. Was proved wrong by industrial revolution. Allen and
causes of innovation and stuff. Using models lets us see the bigger picture. Simplify reality. Ceteris
Paribus needs to be assumed for insignificant factors.
- Capture the elements that matter
- Building the model in such a way it shows the results of interactions between these elements
- Using the model for experiments, discovering the effect of changes in the interactions
- Equilibria can exist in changing conditions, but there needs to be at least one constant factor
Building a model takes the following steps;
- Construct a simplified description of the conditions under which people take actions
- Describe in simple terms what determines the actions that people take
- Determine how each of the actions affects the others
- Determine the outcome of these actions (often an equilibrium)
- Get more insight by studying what happens when a certain variable changes.
- (Kind of like forming a theory)
When making a model, setting some factors aside as ceteris paribus helps simplify your analysis.
Relative prices, for example energy relative to labour, can influence developments and choices.
Capitalism is based on economic rents, the benefit an action has compared to the next best action.
Malthusian model is based on: (1) the law of diminishing average product of labour and (2)
population expands if living standards increase. Did not account for things like the plague and big
technological advancements. Not only did the amount produced increase, but also the amount of the
profit that went to the workers, wealth growth finally became bigger than population growth.
Some underlying assumptions economics use are:
- Insatiability, more is always better than less which is why we look at ‘good’ goods
- Selfishness and the prioritisation of your own wellbeing
- Rationality, humans are always looking for the most efficient and optimised way
- Complete information
When looking at production functions we usually take the amount of capital as a given, because you
cannot increase it in the short run due to the time and money it takes, that is why production
functions usually use an increasing amount of labour. Capital is fixed, the state of technology is given,
but labour is flexible.
, Terminology
Malthusian trap as productivity grows, so does the population,
meaning the level of wealth does not increase,
living at subsidence level
Equilibrium an outcome which will not change unless an
external force is introduced
Ceteris Paribus under the same circumstances, less important
things which can be assumed as constant
Incentive rewards or punishments which influence the
benefits of a certain course of action
Relative price opportunity costs, the relative price of
something compared to the price of something
else
Economic rent benefits received beyond what the individual
would have received in his next best alternative
- can also be called gains from exchange, how
much you get extra from engaging.
Reservation option the next best alternative among all options in a
particular transaction
Dominated an outcome for which more of something that
is positively valued can be attained without less
of anything else that is positively valued, a win-
win alternative
Isocost line a line that represents all combinations that cost
a given total amount, so opportunity costs
again. It can be found by the price times the
amount of one thing, plus the other – page 59
Isoquant line a line that represents all combinations that
produce a given total amount
Factors of production labour, capital, land and other inputs to a
production process
Average product total output divided by a particular input, GDP
per capita for example
Production function the relationship between the amount of output
produced and the amounts of input used to
produce it. So how much L produces how much
Q for example
Average Product of Labour Q/L so the production per worker
Diminishing average product of labour more labour leads to a fall in the average
product of labour, diseconomies of scale
Marginal Product of Labour Derivative of Q, what one extra unit of L
produces extra
Slope a steeper slope represents a higher average so
can be assumed to always be better
Marginal revenue – price x marginal product, needs to be higher
that the marginal cost of labour, thus the wage.
MR = MC
