Summary The Economy 2.0: Microeconomics - Economics 114 (ECON114) - Unit 2 Technology & Incentives (NEW SUMMARIES)

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Unit 2 - Technology & Incentives
- IMPORTANT CONCEPTS -
💡 ECONOMIC DECISIONS
OPTION 1:
Concert Tickets → $25
Enjoyment from Concert → $55
NET BENEFIT: $55 - $25 = $30 (you gain $30 in value)
OPTION 2:
Babysitting pays → $40
Trouble of getting baby to sleep → $18
Net Benefit: $40 - $18 = $22
Concert Benefit → $30 AND Babysitting Benefit → $22 (Therefor
Concert is Better)




💡 ECONOMIC RENT (Surplus)
The difference between your chosen (best) option and your reservation option


Economic Rent = Net Benefit - Opportunity Cost (Extra benefit you get)
Eco Rent of Concert → $30 - $22 = $8


Example:
Preference:
Chicken > Beef
Fish < Beef
So… if chicken is not available then you will choose Beef (Not Fish)
If you choose chicken, you experience more pleasure → ‘Extra Benefit’ = Economic Rent
If you choose reservation option → Economic rent = 0


“Neutral” Option that is
always available
Serves as a
benchmark for
comparison


Possibility of Economic Rent creates → ECONOMIC INCENTIVE




Unit 2 - Technology & Incentives 1

, 💡 Opportunity Costs 💡 INNOVATION RENT
If you take one action you lose the opportunity of taking the next best action The additional profit a frims can make by choosing to use new Tech that reduces costs

Next Best Option → RESERVATION OPTION (Option you gave up) Newer Technology → Enables production at Lower Costs
ECONOMIC COST → Direct Cost + Opportunity Cost Innovator earns Economic Rent (Profit) {Competitors use Old Tech]
Opportunity Cost of Chosen Option= Net benefit of reservation option [Price x Quantity Sold - Cost]
E.g: Attending Concert Economic Cost = Cost of Ticket + Opportunity Cost Temporary → Competitors will also adopt new technology
$25 + $22 = $47 Motivates firms to switch from one technology to another




💡 RELATIVE PRICES
The Ratio of a products money price to the money price of another thing

Example:
Beer costs R50 AND Hamburger costs R25 [Beer’s relative price is 2 Hamburgers]




Relative price of hamburger → Inverse (½ beer)
IF: Prices both double/halve → Relative Price stays the same


QUESTION:
If the Price of everything increases by 15%, did anything really become more expensive?
No, if everything increased by the same percentage, relative price of things would
remain the same
(The purchasing power may decrease depending on income)


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Specialisation
Specialisation = focusing on producing one good or service instead of trying to produce everything.

Why specialise?
🔁 Learning by doing → workers become more skilled over time
🧠 Differences in ability → some producers are naturally better at certain goods
📈 Economies of scale → larger production lowers average cost
👉 Result:
With increased production, everybody can gain from trade.
Remember this. It’s the whole point.



COMPARATIVE ADVANTAGE ABSOLUTE ADVANTAGE
Comparative advantage is about opportunity cost . Absolute advantage is about productivity .

Definition Definition
A person or country has a comparative advantage in producing a good if: A person or country has an absolute advantage if they can produce more of a good using
The opportunity cost of producing that good is lower than another producer’s opportunity the same resources, or use fewer inputs to produce the same output.
cost. Think: Who is simply better at producing more?
Key word: relative cost Example (100% of time spent on one good)
🔎 Step 1: Calculate Opportunity Cost Person Apples Wheat
For Wheat Greta 1,250 apples 50 tonnes
Greta Carlos 1,000 apples 20 tonnes
1 tonne wheat = 1, Who has absolute advantage?
= 25 apples Apples → Greta
Carlos
1 tonne wheat = 1, Wheat → Greta
= 50 apples 👉 Greta has absolute advantage in both goods
👉 Wheat costs fewer apples for Greta She’s just more productive. Carlos is trying his best.
➡ Greta has comparative advantage in wheat
For Apples
Carlos
1 apple = ,000
= 0.02 tonnes wheat (20 kg)
Greta
1 apple = ,250
= 0.04 tonnes wheat (40 kg)
👉 Apples cost less wheat for Carlos
➡ Carlos has comparative advantage in apples




🚨 Important Insight
Even though Greta has absolute advantage in BOTH goods…
➡ Trade still benefits both
➡ Because comparative advantage is about opportunity cost, not productivity




Unit 2 - Technology & Incentives 2