Microeconomics, Institutions and Welfare
Written by Lisanne Louwerse
Universiteit Utrecht – ECB1MI
Book summary of literature:
The Core Team. The Economy. Economics for a Changing World. Oxford University Press.
ISBN: 978-0-19-881024-7
,Table of Content
Week 1..................................................................................................................................................... 3
Week 2..................................................................................................................................................... 6
Week 3..................................................................................................................................................... 8
Week 4................................................................................................................................................... 12
Week 5................................................................................................................................................... 15
Week 6................................................................................................................................................... 20
Week 7................................................................................................................................................... 22
Week 8................................................................................................................................................... 27
Key terms............................................................................................................................................... 32
,Week 1
Isoquant = All input combinations that yield the same output.
Marginal Rate of Technical Substitution (MRTS): How many units of an input have to be replaced by
one unit of another input, to keep the output constant? Slope of isoquant: ΔK / ΔL
Slopes of isoquants can change if there are innovations in technologies.
Isocost line = All input combinations that give the same costs.
Slope of the isocost line (- wage / cost of capital = - w / r ) is the relative price of labor.
Isoquant
Isocost line
Technologies can be:
- Labor intensive: needing a large amount of labor, compared to capital, in relation to output.
This was the case before the Industrial Revolution.
- Capital intensive: needing a large amount of capital, compared to labor, in relation to output.
Optimization problem = given the desired level of quantity, find the lowest possible level of cost
This is the case where the isoquant is tangent to the isocost line: MRTS: ΔK / ΔL = - w / r
, Production function = maximum output for given set of inputs.
Law of diminishing average product of labor: when you put more workers on the same amount of
land, the average output per worker is going to fall.
Malthus’ model
1) Population expands if living standards increase (rising population in response to increases in
wages).
2) But the law of diminishing average product of labor implies that as more people work on the
land, their income will inevitably fall. (Land doesn’t expand, so the more people, the less
efficient it will be.)
-> equilibrium: population and income will stay constant.
Marginal product: change in output per unit change of input (one more farmer gives you X amount
more grain). -> diminishing
Average product: average output per unit of input (total amount of grain / amount of farmers).
Indifference curve: all combinations that give the same utility (satisfaction).
Marginal Rate of Substitution (MRS): The trade-off a person faces between two goods (high grade vs
free time). = slope of indifference curve
Indifference
Curve
Written by Lisanne Louwerse
Universiteit Utrecht – ECB1MI
Book summary of literature:
The Core Team. The Economy. Economics for a Changing World. Oxford University Press.
ISBN: 978-0-19-881024-7
,Table of Content
Week 1..................................................................................................................................................... 3
Week 2..................................................................................................................................................... 6
Week 3..................................................................................................................................................... 8
Week 4................................................................................................................................................... 12
Week 5................................................................................................................................................... 15
Week 6................................................................................................................................................... 20
Week 7................................................................................................................................................... 22
Week 8................................................................................................................................................... 27
Key terms............................................................................................................................................... 32
,Week 1
Isoquant = All input combinations that yield the same output.
Marginal Rate of Technical Substitution (MRTS): How many units of an input have to be replaced by
one unit of another input, to keep the output constant? Slope of isoquant: ΔK / ΔL
Slopes of isoquants can change if there are innovations in technologies.
Isocost line = All input combinations that give the same costs.
Slope of the isocost line (- wage / cost of capital = - w / r ) is the relative price of labor.
Isoquant
Isocost line
Technologies can be:
- Labor intensive: needing a large amount of labor, compared to capital, in relation to output.
This was the case before the Industrial Revolution.
- Capital intensive: needing a large amount of capital, compared to labor, in relation to output.
Optimization problem = given the desired level of quantity, find the lowest possible level of cost
This is the case where the isoquant is tangent to the isocost line: MRTS: ΔK / ΔL = - w / r
, Production function = maximum output for given set of inputs.
Law of diminishing average product of labor: when you put more workers on the same amount of
land, the average output per worker is going to fall.
Malthus’ model
1) Population expands if living standards increase (rising population in response to increases in
wages).
2) But the law of diminishing average product of labor implies that as more people work on the
land, their income will inevitably fall. (Land doesn’t expand, so the more people, the less
efficient it will be.)
-> equilibrium: population and income will stay constant.
Marginal product: change in output per unit change of input (one more farmer gives you X amount
more grain). -> diminishing
Average product: average output per unit of input (total amount of grain / amount of farmers).
Indifference curve: all combinations that give the same utility (satisfaction).
Marginal Rate of Substitution (MRS): The trade-off a person faces between two goods (high grade vs
free time). = slope of indifference curve
Indifference
Curve
