outputandthereforethemostefficientoption,thesetechnologiesarereviewedontheir

Week1

Ceterisparibus:allotherthingsequal

Incentivesmatter:affectthebenefitsandcostsoftakingoneactionasopposedtoanother

Relativeprices:helpswithcomparingalternatives.Thepriceofoneoptionrelativeto

anotherortheratiooftwoprices

Economicrent:thebenefitfromthetakenoptionminusthebenefitofthenextbestoption

Reservationoption:aperson'snextbestalternativeamongalloptionsinaparticular

transaction

Dominatingtechnologies:win-winalternativesforwhichlessinputisneededforthesame

outputandthereforethemostefficientoption,thesetechnologiesarereviewedontheir isocost-line,showingwhatinputsareforagivenoutput→ C=wagexlabor+pricexq Theslopeoftheisocostlineistherelativepriceoflabour.Thiscanbecalculatedby transformingc=wL+pqintoq=c/p-w/pxL→slope=w/p,intercept=c/p

Creativedestruction:aprocessofoldtechnologiesandoldfirmswhodonotusenew

technologies.

Malthusianeconomics:populationgrowthwillalwaysoutrunfoodsupplywithoutstrict

limitsonreproductionoradvancementsinproductiontechnology

Productionfunction:afunctionwhichdescribestherelationshipbetweentheamountof

outputproducedandtheamountsofinputsusedtoproduceit.

Diminishingaverageproductoflabour:asituationinwhich,asmorelabourisusedina

givenproductionprocess,theaverageproductoflabourtypicallyfalls.Averageproduct=totaloutput/totalinput

2keyideasofthemalthusianmodel:

1.thelawofdiminishingaverageproductoflabour 2.populationexpandsiflivingstandardsincrease Themalthusianmodelpredictsthatimprovementsintechnologywillnotraiseliving

standardsif:

-theaverageproductoflabourdiminishesasmorelabourisappliedtoafixedamount ofland -populationgrowsinresponsetoincreasesinrealwages TheMalthusianmodeldidnotconsiderthepossibilityofimprovementsintechnologycould happenatafasterratethanpopulationgrowth,offsettingthediminishingaverageproductof

labour.Thisprocessshowsthatthereweretwoimportantinfluencesonwages:howmuchis

producedandtheamountofwhichisgoingtotheworkers.Averageproduct:theaverageoutputperunitofinput 1 / 3

Marginalproduct:theslopeoftheproductioncurve.Theadditionalamountofoutputthatis

producedifaparticularinputwasincreasedbyoneunit,whileholdingallotherinputs constant.Thiscanbecalculatedbydividingtheverticaldistancebythehorizontaldistance

Indifferencecurve:showsthepreferencesofeachindividualandshowsallthe

combinationsofinputsgivingthesamelevelofutility(theynevercross)

Utility:thenumberofvaluesthatoneplacesonanoutcome

Marginalrateofsubstitution(MRS):atrade-offthatapersoniswillingtomakebetween

twogoods(slopeofindifferencecurve)

Marginalrateoftechnicalsubstitution(MRTS):amountbywhichthequantityofaninput

canbereducedwhenoneextraunitofanotherinputisused,sothatoutputremains constant.Theeasewithwhichoneinputcanbereplacedbyoneormoreunitsoftheother inputwhileholdingproductionconstant,isreflectedintheslopeofthecurve.

opportunitycost:thecostoflettinggothenextbestalternativeoption.

economiccost:sumofout-of-pocketcosts+theopportunitycosts

Feasiblefrontier:themaximumfeasibleamountofonegoodforagivenamountofthe

othergood Feasibleset:allfeasibleoptions,includingtheonesonthefeasiblefrontier.Theslopeofthe feasiblefrontieristheMarginalrateoftransformation(MRT).

MRT:theamountofsomegoodthatmustbesacrificedtoacquireanextraunitoftheother

good.Intheexample,therateatwhichhecantransformfreetimeintogradepoints.Inaconstrainedchoiceproblem,thereisadecision-makerthatmustfindtherightbalance betweenhispreference(indifferencecurve)andhisconstraint(feasiblefrontier).Thebest feasiblechoiceisMRS=MRT.Week2 2 / 3

Lagrangemethod→usedtofindtheequalmarginalprinciple,combinationofgoodsthat achievemaxtotalutility.Conspicuousconsumption=purchasinggoodsorservicestopubliclydisplaywealthrather thantocoverbasicneeds,araisewillshiftyourbudgetconstraintclockwise,resultingintwo

effects:

1.Incomeeffect:effectofadditionalincomeifthereisnochangeinpriceoropportunity

cost

2.substitutioneffect:aneffectduetoincreaseinopportunitycostsasnotworkinghas

becomemore‘expensive’

Incomeeffectofprice:effectofapricechangeonyourpurchasepowerandthroughthis

changeinpurchasepower,theeffectondemand

Substitutioneffectofprice:thepureeffectondemandofchangeinrelativeprices

(excludingchangeinpurchasingpower)

Inferiorgood:agoodwhichcanbereplacedbyabetterversionwhenpeopleareableto

affordthebettergood→potatoes,rice,low-endusedcars.Decreasesincomeeffect

Normalgood:whenincomeincreases,sowillquantities.Increasesincomeeffect

Week3

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