Economics 114 summary

, UNIT 1


Capitalist Revolution~
-




Measuring living standards



Gross Domestic Product measures an
economy's size :




>
the market is produced
-




of within
value all
goods services in a
country a
given
time period
>
-




measure of the total income earned within a country




GDP standards
capita average living
measures
per
:




>
-
GDP
income
per person
or
Population




Measuring economic
growth


Growth rate =

change in GDP

of GDP
original level




GDP
growth rate
>
-




~
"Hockey-stick" curves
represent the sustained rapid growth in GDP
per capita

experienced by countries worldwide

, Inequality, growth


For very did not
long time
,
living standards
grow
in
any
sustained
way.

When sustained
growth occurred it
began in different times and
places .




(now richt
>
-




UK Japan Italy took off
economically century
-

more
ago
a or
, ,




Timing of
growth
>
Britain 1650)
-




it to experience sustained (
was country economic
growth =




Japan
->
(11870)

>
China and India and half
-




happened in the of 20th century.




-Certain only had
economies substantial improvements in
living standards when they gained independence from



colonial rule or interference by European nations




~
Industrial Revolution ~


Capitalism


Technology a
process
that uses a set of inputs ,
including materials
, machinery ,
and labour ,
to


produce an output

,Technological progress means less labour is needed to produce the same
output
Since Industrial witnessed
Revolution we have a
permanent technological revolution




Defining capitalism


It is an economic system that is characterized
by a new combination of institutions

built around :




>
-




Private
property
>
Markets
-




>
Firms
-




But even
capitalist economies rely on
non-capitalist institutions :




>
-




Families
Government
->




> Self-sufficient
family-based
An economic system with private property production


and markets and firms

Y ↳
Market economy Capitalist economic
with family-based
system
production

, How capitalism improved standards
living

Specialization -


the
growth of firms and the
expansion of markets allowed for an




unprecedented division of labour


Technology -

firms competing with one another had
strong incentives to adopt and develop
new and more productive technologies


Gains from specialization


People are more
productive when they focus on limited
range
of activities due to :




>
Differences
-




in ability


Learning
>
-




by doing
>
Economies of
-




scale




Absolute advantage

# person/country has an absolute
advantage in the
production of a
good if the inputs it uses to produce

this
good are less than in some other
person country

,Comparative advantage

A person/country has a
comparative advantage in the production of a
particular good ,
if the

cost of of
producing an additional unit of that
good relative to the cost
producing another



good is lower than another person/country's cost to
produce the same two
goods

, UNIT 2


Economic models



Models abstract from reality to focus attention on the key determinants of an outcome


They show how interactions
generate an
equilibrium and how a
change in conditions affects this
equilibrium
Models be presented verbally mathematically,
can
,
or
graphically
Good economic models are clear , accurate ,
and useful




Equilibrium
A situation
>
-




that is
self-perpetuating
↑

Something of interest does not
change unless an outside external force for
change
is introduced that alters the model's description of the situation




Malthusian
>
-




model ,
an income at subsistence level is an
equilibrium because movements away

from subsistence they automatically
income are
self-correcting lead back to subsistence income
:




as
population rises




Malthusian economics




At famine influenced
the time of the Malthus theory economists
thinking

, Malthus believed that :




Despite gains
of
technological advances ,
nations would never be able to


sustain an increase in income per capita. He proposed that as
people's income



increased , they would have a desire to have more children as
affordability
within the household increased. Eventually population growth would outstrip resources



and
living standards would decrease which would halt the population


growth.




The "Malthusian Trap"
>
Income
growth
-




would lead
growth to population
This
>
to
falling
-




would lead levels
income as more
people put pressure on available


resources
(especially land)




This model abstracts from
aspects of food production and makes 2 key assumptions :




Production function of labour
diminishing average product
.
1
has a




Average product of labour - total product
number of farmers