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Chapter 2 - Coggle Diagram
Chapter 2
Unit 2
When we build a model, the process follows these steps:
1) We construct a simplified description of the conditions under which people take actions
2)Then we describe in simple terms what determines the actions people take
3)We determine how each of their actions affects each other
4)We determine the outcome of these actions
5)We try to get more insight by studying what happens to certain variables when conditions change
To create an effective model:
-Distinguish between the essential features of the economy that are relevant to the question we want to answer
-Models come in many forms:
1)Diagrammatic model
2)Physical model
A good model has 4 characteristics:
-It is clear
-It predicts accurately
-It improves communication
-It is useful
A model starts with some assumptions or hypothesis about how people behave, and often gives us predictions about what we will observe in the economy. Gathering data on the economy; and comparing it with what a model predicts, helps us to decide whether the assumptions we made wen we built the model - what to include, and what to exclude - were justified
Unit 3
People are motivated not only by the desire for material gain but also by love, hate, sense of duty, and desire for approval
Economic modelling:
-Ceteris Paribus - we see more by looking at less
-Incentives - affects benefits and costs
-Relative price - help us compare alternatives
Economic rent - basis of how people make choices
Unit 1
The industrial revolution was more than just the breaking of the Malthusian cycle: it was a complex combination of inter-related intellectual, technological, social, economic and moral changes
Industrial revolution did not lead to economic growth everywhere. It originated in Britain. It implied a huge increase in income inequality between countries
Unit 5
Relative prices changed, Cost of production is 50, switching A technology (more energy-intensive instead of labour-intensive) reduces cost to 40
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Unit 6
This made isocost lines steeper in poor countries, again providing an incentive to switch to labour-saving technology
The B technology could be preferred in the diagram if the isocost line is flatter that HJ, so that it still goes through B but below A
A second factor that promoted the diffusion across the world of the new technologies was wage growth and falling energy cost
Once the A-technology is available, it would be chosen both in countries using A, and in those using B
Unit 4
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If prices of inputs are fixed, the isocost lines are parallel
Firm can calculate the cost of any combination of inputs that it might use by multiplying the number of workers (L) by the wage (W) and the tonnes of coal (R) by the price of coal (P)
cost = (W x L) + (P x R)
The slope if any isocost line is -W/P ,therefore always negative
Unit 7
Production function is a relationship between two quantities, expressed as: y = f(x)
x = amount of labour devoted to farming
y = output in grain
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The average product of a farmers labour is:
average product of labour = total output / total number of farmers
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Diminishing average product of labour can be caused by:
-more labour devoted to a fixed quality of land
-more inferior land brought into cultivation
Unit 8
Two key ideas in Malthus' model:
-The law of diminishing average product of labour
-Population expands if living standards increase
The Malthusian model predicts that improvements in technology will not raise living standards if:
-The average product of labour diminishes as more labour is applied to a fixed amount of land
-Population grows in response to increases in real wages
The diminishing average product of labour does not explain the long, flat portion of the hockey stick, it just means that living standards depend on the size of the population
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Unit 11
Malthusian model, in which population growth offset temporary gains in income, could explain stagnation in living standards for centuries before the industrial revolution
Firms choice of production technologies depend on the relative prices of inputs, and the economic rent from adopting a new technology provides an incentive for firms to innovate
Unit 10
They did not consider the possibility that improvements in technology could happen faster than population growth, offsetting the diminishing average product of labour