Lecture 1
Microeconomics, institutions and welfare
Economic development
GDP- gross domestic product – all the goods and services that are produced in a country (all
of the production is included).
-Question> What do you think about GDP as a measure of living standards?
GDP and equality- The GDP as an average measure per capita for a country, doesn’t take
equality in account. GDP doesn’t capture inequality.
-Question> What do you think about happiness as a measure of living standards?
Countries where there’s a lot of equality score very high on the report of life satisfaction.
-Why not use this happiness meter (from the lecture> ladder) to measure economic
development?
Happiness is strongly correlated with people’s emotional situation at that particular time. It’s
a nice objective but there a lot of concerns, we have to take in account if we want to develop a
good measure of the welfare and development in society.
The technological revolution
Technology: Is a process that uses inputs to produce an output.
Around the time of the 1700s/ 1800s some remarkable scientific and technological advances
occurred around the same time as the upward kick in the hockeystick in Britain. These
technological improvements changed the living standards of people a lot.
Because technology was available people were able to produce at similar levels, the same
output with similar inputs in a much shorter time. This implied that the amount of work time
that was needed to produce certain things really reduced.
The industrial revolution
Industrial revolution: a wave of technological advances starting in Britain in the 18th century,
which transformed an agrarian and craft-based economy into a commercial and industrial
economy. Example> the productivity of labour in producing light is half a million time
greater than it was among our ancestors with a campfire.
Communication revolution?
Technological progress also greatly improved the speed at which information travels.
The Capitalist revolution
Capitalism (= the idea that there was an ownership over large amount of capital) led to growth
in living standards because:
- specialization: The growth of firms and the expansion of markets linking the entire world
,allowed historically unprecedented specialization in tasks and production. Specialization is
possible when people can acquire other goods via the market.
The fact that there was capital meant that firms could grow and expand markets (firms started
to compete in markets and needed to develop technologies to deliver superior, to reach
quantities but also to deliver products)
Impact on technology: Firms competing in markets had strong incentives to adopt
and develop new technologies
-learning by doing
- taking advantages of natural differences in skill and talent
-economies of scale
Together with the technological revolution, this increased worker productivity.
Differences in capitalism’s success due to:
1. Ownership/ property laws 2. Competitiveness of markets 3. Quality of institutions.
What is economics?
Economics is about scarcity and economics is about economic agents allocate scarce
resources to maximize their utility/profit/output.
Economics is the study of how people interact with each other and with their natural
surroundings in producing their livelihoods, and how this changes over time.
This is the same for firms and household, your time and money constrained and you have to
decide what you’re going to spend you’re time and money on. You have many options and
you have to make decisions which you do based on you’re preferences and beliefs. We can
see these households and firms as production units.
Why did the Industrial Revolution happen first in the 18th Century, on an island off the coast
of Europe, and why not in the Democratic Republic of Congo, Japan, or Canada?
There are many alternative explanations:
relatively high cost of labour and cheap local sources of energy
Europe’s scientific revolution and Enlightenment
political and cultural characteristics of nations as a whole
cultural attributes such as hard work and savings
abundance of coal and access to colonies
modelling technology
technology: A process that uses inputs to produce an output.
• Firms choose between technologies (specific combinations of inputs) to produce outputs.
• Some technologies are dominated by other technologies.
, Isoquant: All input combinations that yield the same output (= minimum required quantity of
inputs)
MRTS: Amount by which the quantity of an input can be reduced when one extra unit of
another input is used, so that output remains constant.
The ease with which one input can be replaced by one or more units of the other in- put while
holding production constant, is reflected in the slope of the curve.
MRTS = −∆K/∆L = MPL/MPK
The derivative (= it tells us how function changes as a
resolved of a change in X)- How foes a function f (x)
change as a function of a change in x?
MRTS of labour for capital is the amount by which capital can be reduced when one extra
unit of labour is used.
technological difference: Reflected in the different slopes of the curves.
Firms>
-Firms aim to maximize their profit, which means producing cloth at the least possible cost.
Microeconomics, institutions and welfare
Economic development
GDP- gross domestic product – all the goods and services that are produced in a country (all
of the production is included).
-Question> What do you think about GDP as a measure of living standards?
GDP and equality- The GDP as an average measure per capita for a country, doesn’t take
equality in account. GDP doesn’t capture inequality.
-Question> What do you think about happiness as a measure of living standards?
Countries where there’s a lot of equality score very high on the report of life satisfaction.
-Why not use this happiness meter (from the lecture> ladder) to measure economic
development?
Happiness is strongly correlated with people’s emotional situation at that particular time. It’s
a nice objective but there a lot of concerns, we have to take in account if we want to develop a
good measure of the welfare and development in society.
The technological revolution
Technology: Is a process that uses inputs to produce an output.
Around the time of the 1700s/ 1800s some remarkable scientific and technological advances
occurred around the same time as the upward kick in the hockeystick in Britain. These
technological improvements changed the living standards of people a lot.
Because technology was available people were able to produce at similar levels, the same
output with similar inputs in a much shorter time. This implied that the amount of work time
that was needed to produce certain things really reduced.
The industrial revolution
Industrial revolution: a wave of technological advances starting in Britain in the 18th century,
which transformed an agrarian and craft-based economy into a commercial and industrial
economy. Example> the productivity of labour in producing light is half a million time
greater than it was among our ancestors with a campfire.
Communication revolution?
Technological progress also greatly improved the speed at which information travels.
The Capitalist revolution
Capitalism (= the idea that there was an ownership over large amount of capital) led to growth
in living standards because:
- specialization: The growth of firms and the expansion of markets linking the entire world
,allowed historically unprecedented specialization in tasks and production. Specialization is
possible when people can acquire other goods via the market.
The fact that there was capital meant that firms could grow and expand markets (firms started
to compete in markets and needed to develop technologies to deliver superior, to reach
quantities but also to deliver products)
Impact on technology: Firms competing in markets had strong incentives to adopt
and develop new technologies
-learning by doing
- taking advantages of natural differences in skill and talent
-economies of scale
Together with the technological revolution, this increased worker productivity.
Differences in capitalism’s success due to:
1. Ownership/ property laws 2. Competitiveness of markets 3. Quality of institutions.
What is economics?
Economics is about scarcity and economics is about economic agents allocate scarce
resources to maximize their utility/profit/output.
Economics is the study of how people interact with each other and with their natural
surroundings in producing their livelihoods, and how this changes over time.
This is the same for firms and household, your time and money constrained and you have to
decide what you’re going to spend you’re time and money on. You have many options and
you have to make decisions which you do based on you’re preferences and beliefs. We can
see these households and firms as production units.
Why did the Industrial Revolution happen first in the 18th Century, on an island off the coast
of Europe, and why not in the Democratic Republic of Congo, Japan, or Canada?
There are many alternative explanations:
relatively high cost of labour and cheap local sources of energy
Europe’s scientific revolution and Enlightenment
political and cultural characteristics of nations as a whole
cultural attributes such as hard work and savings
abundance of coal and access to colonies
modelling technology
technology: A process that uses inputs to produce an output.
• Firms choose between technologies (specific combinations of inputs) to produce outputs.
• Some technologies are dominated by other technologies.
, Isoquant: All input combinations that yield the same output (= minimum required quantity of
inputs)
MRTS: Amount by which the quantity of an input can be reduced when one extra unit of
another input is used, so that output remains constant.
The ease with which one input can be replaced by one or more units of the other in- put while
holding production constant, is reflected in the slope of the curve.
MRTS = −∆K/∆L = MPL/MPK
The derivative (= it tells us how function changes as a
resolved of a change in X)- How foes a function f (x)
change as a function of a change in x?
MRTS of labour for capital is the amount by which capital can be reduced when one extra
unit of labour is used.
technological difference: Reflected in the different slopes of the curves.
Firms>
-Firms aim to maximize their profit, which means producing cloth at the least possible cost.
