Models, Technology & Production PDF

What is Economics? AND HOW ECONOMISTS TRY TO UNDERSTAND THE WORLD The Economy 2.0 – Unit 1 + Unit section 2.8 🤔  What is Economics? “Economics is the study of how people interact with each other and with their...

What is Economics? AND HOW ECONOMISTS TRY TO UNDERSTAND THE WORLD The Economy 2.0 – Unit 1 + Unit section 2.8 🤔  What is Economics? “Economics is the study of how people interact with each other and with their natural surroundings in producing their livelihoods, and how this changes over time” The Economy, The CORE Project Economics studies how to use limited resources à trade-off between choices We will look at: Individuals, decisions and conflicts Firms, individuals and institutions Markets and the state  How economists try to understand the world… Models Reality is complex: impossible to consider everything simultaneously Models: o Simplify reality: based on simplifying assumptions o There are several ways to model the same problem o All models are wrong… Some are useful.  How economists try to understand the world… Models Building Models o Start with a question. o Look at the evidence o Build a model that helps you understand what you see. o Critically evaluate the model § Does it provide insight into the question? § Does it explain the evidence? Technology, Population, Growth The Economy – Unit 2 sections 2.4 and 2.7 to 2.11  Historical data: Evolution of Living Standards Since the 1700s the average living standards increased in many countries. In particular after the 1800s.  Historical data: Evolution of Living Standards Historical data raises the question: why did this upward turn started around 200 years ago? 1. The emergence of Capitalism § A new economic system in which private property, markets and firms play a major role. Economic system: the institutions that organize the production and distribution of goods and services in an entire economy Institutions: the laws and social customs governing the way people interact in society § More info on this: The Economy – Unit 1: Capitalism: Private Property, Markets and Firms, Recommended reading (not in the slides)  Historical data: Evolution of Living Standards Historical data raises the question: why did this upward turn started around 200 years ago? 2. Technological progress § Changes in technology that reduce the amount of resources (labour, machines, land, energy, time) required to produce a given amount of output. Also new products and services introduced over time to satisfy needs § A technology is defined by the way inputs are combined to obtain outputs o Inputs or factors of production: The labour, machinery and equipment (usually referred to as capital), land, and other inputs to a production process. o Outputs: quantity that is produced of something  How do we represent a technology? Production Function o Maximum amount of output resulting from a given combination of inputs o Describes differing technologies capable of producing the same thing o Often described as Q = f(K, L), where K is capital and L is labour § How much we can produce using a given amount of capital and labour  How do we represent a technology? ! à Q = f (L) Example: Q = f(K, L) with K fixed at a specific level 𝐾 Q Q Production Functions can have different shapes, depending on the technology they are describing Labour Labour Two different technologies  How do we represent a technology? Average Product of Labour (APL): Output per unit of labour. ! o APL = à Ratio of vertical by horizontal distance of any point of Q=f(L) " Marginal Product of Labour (MPL): Change in output for unit change in units of labour. #! o MPL = #" à Slope of the production function Q = f(L) or !!$!" o MPL = "!$"" if we have discrete data  How do we represent a technology? Example 1: Q = K0,5L0,5 with K = 100 o For K = 100: o APL = o MPL =  How do we represent a technology? Example 2: Discrete data L (nr workers) Q APL MPL 20 2000 40 3300 50 4000  How do we represent a technology? Q Example 3: Graphically Slope = MPL At point A: o APL = !" à slope of a line Q A connecting the origin (0,0) and the point we are analysing o MPL = Slope of the production function Q = f(L) à slope of the line tangent to point A Slope = APL L Labour  Technological Progress Technological progress can be described in three equivalent ways 1. A change in technology that allows to produce more output with the same amount of inputs or 2. A change in technology that allows to produce the same output using less inputs or 3. A change in technology that allows to reduce the costs of production  Technological Progress Q Q2 Q = f2(L) Same Q, less inputs Q1 or Q Q = f1(L) Same inputs, more Q L2 L1 L Labour  Technology, Population, Growth Example: Malthusian Economics (Thomas Malthus) – a model o 1 input 1 output – farmers and grain produced o Assumptions: § Farmers work on a fixed amount of land § The more farmers there are, the more grain is produced, at least up to a certain point § Diminishing average product of labour: APL decreases as the number of farmers increase § Population growth is limited by the availability of resources Increase if living standards improve Decrease if living standards deteriorate  Technology, Population, Growth How to check APL “graphically”? APL in a point can 732 be inferred from the angle created by a straight line 500 connecting the origin and that point (orange dashed lines) Where is APL higher A or B?  Technology, Population, Growth The effect of an improvement in technology Q2 o Consider we start C with 1600 farmers 878 732 Q1 and technology Q1 o Technology 500 improves to Q2 § With 1600 farmers we are now able to produce more grain (point C) o What happens to APL? Are farmers better off?  Technology, Population, Growth The effect of an improvement in technology Q2 C o What happens to APL 878 from B to C? 732 Q1 § APL increases § APL in C = 500 878000/1600 = 549 > 458 o Are farmers better off? § Yes: on average each is producing more § Living standards increase  Technology, Population, Growth The effect of an improvement in technology D Q2 C 878 o Recall assumption: 732 Q1 population expands if living standards increase 500 o From C to D Population Increase § Population increases § We have more farmers § APL starts decreasing  Technology, Population, Growth The effect of an improvement in technology D E Q2 C o When will population 878 stop increasing? 732 Q1 § When we return to the inicial APL 500 o At point E § More Population § More production § Same APL as in B § Same living standards  Technology, Population, Growth Example: Malthusian Economics (Thomas Malthus): o Malthusian Trap: improvements in technology don’t result in better living standards due to population growth o This is a possible explanation for the absence of growth until the 1800s  Technology, Population, Growth Escaping the Malthusian Trap o In Malthus model he didn’t consider that improvements in technology could happen at a faster rate than population growth o If technology grows faster than population the diminishing average product of labour effect can be offset o If technology grows faster than population we expect economic growth (increase in living standards) § This can be one explanation for the upward trend started in the 1800s  Technology, Population, Growth Escaping the Malthusian Trap E D Q2 C 878 Q1 732 500