ECONOMIC GROWTH AND INEQUALITY Indifference Curves
Economic incentives Tangency
Economic outcomes Marginal product of labor
Nominal GDP Sunk Cost Fallacy
Real GDP Tversky and Khaneman - prospect theory
Y= C + I +G + (X-M)
Purchasing power parity INSTITUTIONS
Finished good Importance of institutions (bargaining power,
Intermediate good distribution of wealth)
Capital good Production with no interference: MRS = MRT (everyone
Economic growth: is an entrepreneur)
○ % change in GDP = GDPtoday - GDPtoday - 1 Production under absolute power: MRT > MRS ( worker
year ÷ GDPtoday - 1 year X 100 gets the biological survival constant. - no bargaining
Capitalism - private property, markets, firms power)
Capitalism gives us Reservation price (z)
Division of labor, specialization, entrepreneurial Economic rent
inventions Joint surplus
Creative destruction What influences bargaining power? Institutions, outside
options, coercion
ECOSOC INTERACTIONS & GAME THEORY Lorenz curve
Elements of a game Gini Coefficient
○ Players, feasible strategies, information, ○ inequality gap (up area) / inequality gap +
payoffs actual income distribution
Payoff Matrix
Dominant strategy FIRMS
Equilibrium 2 ways to divide labor: markets and firms
Nash Equilibrium Transaction costs
Public goods ○ Search and info
Collective action problem - Tragedy of Commons ○ Bargaining and decision
How to overcome collective action problem ○ Policing and enforcement
Markets are useful for: spot transactions
○ Repeated interaction, less players, institutions
Firms are useful for: tasks not clearly defined, difficulty
Loss aversion
to monitor
Discounting behavior
Agency Dilemma
Employees fear getting fired when they receive rent
MODELING
When is employment rent high?
Key ideas of modeling
Calculating employment rent
○ Ceteris paribus, incentives, relative prices
○ Reservation wage - disutility of effort
Production Functions Labor discipline model
Marginal Product Employment Game
Diminishing marginal product Worker’s best response curve
Opportunity cost Firm’s best response
○ Relative price (what else could i be producing) ○ Minimizing the cost per unit of effort
Economic rent ○ W/E
○ Value you place - economic cost Isocost line
Economic cost ○ Profits are maximized at the steepest isocost
○ Monetary + opportunity cost line
Feasible frontier Efficiency wage
Marginal Rate of Transformation - constraints Alternatives to firm
Marginal Rate of Substitution - willingness ○ Cooperatives
MRS = MRT ○ The gig economy
Diminishing MRS ○ Public sector firms
Economic incentives Tangency
Economic outcomes Marginal product of labor
Nominal GDP Sunk Cost Fallacy
Real GDP Tversky and Khaneman - prospect theory
Y= C + I +G + (X-M)
Purchasing power parity INSTITUTIONS
Finished good Importance of institutions (bargaining power,
Intermediate good distribution of wealth)
Capital good Production with no interference: MRS = MRT (everyone
Economic growth: is an entrepreneur)
○ % change in GDP = GDPtoday - GDPtoday - 1 Production under absolute power: MRT > MRS ( worker
year ÷ GDPtoday - 1 year X 100 gets the biological survival constant. - no bargaining
Capitalism - private property, markets, firms power)
Capitalism gives us Reservation price (z)
Division of labor, specialization, entrepreneurial Economic rent
inventions Joint surplus
Creative destruction What influences bargaining power? Institutions, outside
options, coercion
ECOSOC INTERACTIONS & GAME THEORY Lorenz curve
Elements of a game Gini Coefficient
○ Players, feasible strategies, information, ○ inequality gap (up area) / inequality gap +
payoffs actual income distribution
Payoff Matrix
Dominant strategy FIRMS
Equilibrium 2 ways to divide labor: markets and firms
Nash Equilibrium Transaction costs
Public goods ○ Search and info
Collective action problem - Tragedy of Commons ○ Bargaining and decision
How to overcome collective action problem ○ Policing and enforcement
Markets are useful for: spot transactions
○ Repeated interaction, less players, institutions
Firms are useful for: tasks not clearly defined, difficulty
Loss aversion
to monitor
Discounting behavior
Agency Dilemma
Employees fear getting fired when they receive rent
MODELING
When is employment rent high?
Key ideas of modeling
Calculating employment rent
○ Ceteris paribus, incentives, relative prices
○ Reservation wage - disutility of effort
Production Functions Labor discipline model
Marginal Product Employment Game
Diminishing marginal product Worker’s best response curve
Opportunity cost Firm’s best response
○ Relative price (what else could i be producing) ○ Minimizing the cost per unit of effort
Economic rent ○ W/E
○ Value you place - economic cost Isocost line
Economic cost ○ Profits are maximized at the steepest isocost
○ Monetary + opportunity cost line
Feasible frontier Efficiency wage
Marginal Rate of Transformation - constraints Alternatives to firm
Marginal Rate of Substitution - willingness ○ Cooperatives
MRS = MRT ○ The gig economy
Diminishing MRS ○ Public sector firms
