Summary The Economy 2.0: Microeconomics - Economics 114

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Unit 1 - Inequality & Prosperity

UNIT 1 - PROSPERITY, INEQUALITY AND PLANETARY LIMITS

MEASURING LIVING STANDARDS
GDP (Gross Domestic Product) ~ Measures an Economy’s Size
The market value of all goods and services produced in a country within a given time period (Typically 1 Year)
Measures the total income earned within a country

GDP per Capita ~ Measures Average Living Standards
Income per person OR GDP ÷ Population

Growth Rate ~ Measures Economic Growth




NOTE:
GDP may not be Sufficient:
It includes bad things
Some countries have higher population
Therefor you use GDP per Capita
It gives more accurate number
Can be compared between countries



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INCOME INEQUALITY

Normal Graph:
Resembles Hockey Stick
Shows how levels of income Remain low & then suddenly
spike
African Graph:
Why not Hockey Stick? (Have not occurred yet)
Colonial Rule
Lack of Information Collected
Extractive Institutions (Take Resources Abroad)




Unit 1 - Inequality & Prosperity 1

, GDP GROWTH SPIKE (Reasons) GDP GROWTH STAGNATION


1. Industrial 1. Employment &
(Tech) Output (APL)
Revolution 2. Malthusian
2. Capitalism Model



Employment & Output (APL)
Technological Revolution
Production Function:
Technology: Use inputs to convert them into output
Process of using inputs to create Output Agriculture
Technology progress → less labour needed for Assume land is fixed & only uses labour
same output
↑ Labour = ↑ Workers on same quantity of land
Industrial Revolution:
APL ↓
Less time to produce goods & services
APL (Average Product of Labour) → Total Output ÷ Nr
Continuous Process of Workers
Since Start: Permanent Technological Revolution

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MALTHUSIAN MODEL


EQUILIBRIUM IN MATHUSIAN MODEL EFFECT OF IMPROVEMENT IN
TECHNOLOGIES
POPULATION & LIVING STANDARDS
Population expands if living standards increase
Further population growth → puh down income due to
diminishing APL
Falling living standards → slow population growth
Ultimately Income settles at SUBSTINENCE LEVEL
Level of income where population remains constant over
time (Equilibrium)




Technology Improves → Productivity ↑ (Curve Shifts
Upwards)
1st - Income per Farmer rises above subsistence level
THEN - Higher Income = Higher Population Growth
↑ Population = More share land = Income p.p falls to
subsistence level
THEREFOR: Tech increases population, not long-run
living standards


Any improvement in Tech gets “absorbed” by
population growth (Income per person cannot
permanently rise)
That’s why living standards stayed roughly constant
Industrial Revolution broke this Pattern




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EXAM PRACTICE QUESTION

1️⃣
Explain the Malthusian Model’s Equilibrium and describe how the “Malthusian Trap” prevented permanent increases in living standards despite technological progress for most of human
history.
TIP: Refer to Graphs

ANSWER:
The model's equilibrium occurs when income is at the subsistence level. If small population causes the average product of labour (APL) to rise above subsistence, the population increases; if it
falls below, the population decreases until it returns to equilibrium. However, because land is a fixed factor, adding more workers to that land leads to diminishing return/APL. Each additional
worker eventually has fewer resources to work with, causing the output per person to fall. When Technology improves, productivity initially rises, pushing income per person above the
subsistence. However, this higher income leads to better nutrition and higher birth rates, causing the population to grow. As the population grows the Average Product of Labour (APL)
decreases again towards the equilibrium. Thereby the cycle continues.

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Unit 1 - Inequality & Prosperity 2