Podcast
Questions and Answers
According to the economic model of decision-making, what is the primary decision rule?
According to the economic model of decision-making, what is the primary decision rule?
- Choose the option with the lowest monetary cost.
- Choose the option that aligns with individual preferences, regardless of cost.
- Choose the option that maximizes enjoyment value.
- Choose the option that delivers the highest net benefit (or pay-off). (correct)
What does 'economic rent' represent in economic decision-making?
What does 'economic rent' represent in economic decision-making?
- The value of the next best action not taken.
- The sum of direct costs and opportunity costs.
- The direct costs incurred by taking an action.
- The overall gain when you choose the best option rather than the next best one. (correct)
How do potential innovation rents motivate firms?
How do potential innovation rents motivate firms?
- By decreasing the importance of economic incentives.
- By encouraging them to maintain existing technologies.
- Reducing the need for economic decision-making.
- By providing incentives for taking action and switching to new technologies. (correct)
What role do 'relative prices' play in economic incentives?
What role do 'relative prices' play in economic incentives?
What is the definition of 'opportunity cost'?
What is the definition of 'opportunity cost'?
What are the key factors that influence economic decisions?
What are the key factors that influence economic decisions?
In the context of production, what does specialization refer to?
In the context of production, what does specialization refer to?
Name the 3 reasons specialization can happen:
Name the 3 reasons specialization can happen:
In the context of international trade, what does 'comparative advantage' refer to?
In the context of international trade, what does 'comparative advantage' refer to?
How can countries benefit from specializing and trading?
How can countries benefit from specializing and trading?
How does division of labor within firms increase productivity?
How does division of labor within firms increase productivity?
How can a firm decide on how much output it can produce?
How can a firm decide on how much output it can produce?
What is the formula presented for the production function of a firm that produces olive oil?
What is the formula presented for the production function of a firm that produces olive oil?
What are the main inputs in the olive oil production function presented?
What are the main inputs in the olive oil production function presented?
What does production function represent?
What does production function represent?
What is the significance of potential innovation rents for a company?
What is the significance of potential innovation rents for a company?
In the context of technology and production in firms, what is a critical decision?
In the context of technology and production in firms, what is a critical decision?
How do firms evaluate the cost of production when choosing between different technologies?
How do firms evaluate the cost of production when choosing between different technologies?
Consider a scenario where Greta can produce 1250 apples or 50 tons of wheat, while Carlos can produce 1000 apples or 20 tons of wheat. Who has the absolute advantage in producing apples?
Consider a scenario where Greta can produce 1250 apples or 50 tons of wheat, while Carlos can produce 1000 apples or 20 tons of wheat. Who has the absolute advantage in producing apples?
Consider a scenario where Greta can produce 1250 apples or 50 tons of wheat, while Carlos can produce 1000 apples or 20 tons of wheat. Who has the absolute advantage in producing wheat?
Consider a scenario where Greta can produce 1250 apples or 50 tons of wheat, while Carlos can produce 1000 apples or 20 tons of wheat. Who has the absolute advantage in producing wheat?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. What is Greta's opportunity cost of producing 1 ton of wheat?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. What is Greta's opportunity cost of producing 1 ton of wheat?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. Who has the comparative advantage in producing apples?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. Who has the comparative advantage in producing apples?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. Who has the comparative advantage in producing wheat?
Greta can produce 1,250 apples or 50 tons of wheat, while Carlos can produce 1,000 apples or 20 tons of wheat. Who has the comparative advantage in producing wheat?
In a fixed-proportions technology, how does increasing one input without increasing others affect the output?
In a fixed-proportions technology, how does increasing one input without increasing others affect the output?
What does 'constant returns to scale' imply for production?
What does 'constant returns to scale' imply for production?
In a scenario with two technologies available for olive oil production, what is the most critical factor to consider when deciding which technology to adopt?
In a scenario with two technologies available for olive oil production, what is the most critical factor to consider when deciding which technology to adopt?
How does the graph showing the labor/energy with different technologies help in deciding which technology to use?
How does the graph showing the labor/energy with different technologies help in deciding which technology to use?
Within a firm, which setup promotes productivity?
Within a firm, which setup promotes productivity?
Flashcards
Opportunity Cost
Opportunity Cost
Value of the next best action not taken.
Reservation Option
Reservation Option
The next best alternative to a chosen action.
Economic Cost
Economic Cost
Direct costs + opportunity cost of an action.
Economic Rent
Economic Rent
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Innovation Rents
Innovation Rents
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Incentives
Incentives
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Relative Prices
Relative Prices
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Specialization
Specialization
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Absolute Advantage
Absolute Advantage
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Comparative Advantage
Comparative Advantage
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Division of labor
Division of labor
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Study Notes
Technology and Incentives: Economics of Innovation
- Recent, rapid, and sustained increases in income and living standards are due to technological progress
- Major economic changes started about 200 years ago
- Economic models can explain the growth in real wages and population over the last two centuries
Lecture Outline
- How improvements in technology happen
- How technology helps sustain growth in living standards
- Economic model of decision-making is key
- Focus on technologies and innovation
- Later, economic models will be reviewed
Economic Decisions
- Decisions made by individuals, firms, and governments shape the economy
Decision Making
- Understanding the economy means understanding how people decide
- People consider various factors when choosing an action
Thought Experiment: Concert vs. Babysitting
- Concert ticket costs $25
- Personal enjoyment value of concert is $55
- Willingness to pay measures enjoyment
- Net benefit of the convert is $30 (also known as the "pay-off")
- The cost of the concert is monetary, while the benefit is personal
- Babysitting payment is $40
- Babysitting effort costs $18
- Net benefit of taking the babysitting job is $22
Model of Decision Making
- Identifies main factors in decision
- Specifies a decision rule: choose the option with the highest net benefit/pay-off
- Predicts outcomes based on costs, benefits, and individual preferences
Key Concepts
- Opportunity cost is the value of the next best action not taken
- Reservation option is the next best alternative you have
- Economic cost is direct costs plus opportunity cost
- Economic rent is overall gain selecting the best option rather than the next best
- Economic rent equals benefit from the chosen option minus economic cost
- Economic rent also equals net benefit from the chosen option minus net benefit from the next best option
Applying the Concepts: Concert Example
- Concert ticket costs $25
- Concert enjoyment value is $55
- Concert net benefit equals $30
- Reservation option is earning $22 from babysitting
- Opportunity cost of going to the concert is $22
- Economic cost equals $47
- Economic rent is $8
Innovation Rent and Relative Prices
- Innovation rents are extra profits from exploiting an invention and a form of economic rent.
- Economic rents provide incentives for action
- Potential innovation rents may motivate firms to switch technologies
- Innovation rents help explain factors that contributed to the Industrial Revolution
- Innovation Rent is calculated by taking the profits from a new technology minus the profits from using an existing technology
- Incentives are economic rewards/punishments influencing decisions
- Relative prices, expressed as a ratio, compare alternatives and determine economic incentives
Comparative Advantage and Specialization
- Specialization is when each person focuses on one/few tasks
Specialization Factors include
- Differences in ability
- Learning by doing
- Economies of scale
- Specializing and trading benefits those with differing abilities
Comparative and Absolute Advantage
- Absolute advantage means being more productive in producing a good
- Comparative advantage means having a lower relative cost to produce a good
Absolute and Comparative Advantage: Greta and Carlos Example
- Greta has absolute advantage in both apples and wheat; Carlos has absolute disadvantage
- Carlos's disadvantage is less in apples than in wheat
- Greta can produce 2.5x the wheat compared to Carlos, but only 1.25x the apples
- Greta has a comparative advantage in wheat; Carlos has a comparative advantage in apples
Opportunity Cost Example
- Greta’s relative cost of wheat is lower, therefore Greta has comparative advantage
- Carlos’s relative cost of producing an apple is lower
Self-Sufficiency vs. Specialization and Trade
- Both parties consume more of both goods when specializing/trading vs. being self-sufficient
- Specializing and trading leads to both parties being better off
- The trade price is measured versus a standardized good
Division of Labour in Firms
- Markets allow people and firms to specialize
- Division of labor: specialization within a firm or society
- Firms facilitate cooperation among specialized producers to increase productivity
Technology and Production in Firms
- Choosing production technology is a key decision for firms
- Decision of amount of inputs employed determines the amount of output
- Olive oil production: Y = f(M, N, E), where:
- M is the number of machines
- N is the number of workers
- E is the amount of energy used per day
Production Technologies
- Labour-intensive
- Capital intensive
Fixed-Proportions Technology and CRS
- Fixed proportions: inputs needed in set ratios
- Combinations of M, N, and E are combined to create the number of litres
- Increasing one input without others does not increase output
- Constant returns to scale (CRS): doubling inputs doubles output
- The table shows how much output is produced for different combinations of labor, machines, and energy
- For every three machines, one worker, and 80 kWh of energy are needed
Technology Choice
- Compare constant-returns technologies by comparing input requirements for creating standard output
Comparing Input Requirements
- Average product of labor: output per worker
- B is more energy intensive than A
- The slope of each ray corresponds to the energy–labour ratio
- The steeper the ray, the more energy–intensive the technology
- Neither technology is necessarily better than the other
- Owner needs to consider relative costs of inputs
- Choosing technology was a key factor in the Industrial Revolution
Summary
- Models provide technological revolution insights
- Economic decisions involve cost/benefit comparisons; opportunity costs and incentives play a factor
- Specialization/trade, based on comparative advantage, allows for higher productivity
Review Resources
- The Economy 2.0 Microeconomics Unit 2
- Unit 2 quiz available on Moodle
- Applying of models introduced in Unit 2
- Exercise 2.1 and 2.3 will be covered
Looking Ahead
- Technology and costs
- How firms evaluate production costs with different technologies
- Use of isocost Lines
- Simplification with: Ceteris paribus
- Scarcity, wellbeing, and working hours will be discussed
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