Chapter 6 - Handout.pdf - Chapter 6 Growth and Ideas Emily...

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Chapter 6 Growth and Ideas Emily Marshall, Dickinson College Revised, Expanded, and Updated by Simeon Alder U of Wisconsin - Madison Copyright © 2018 W. W. Norton & Company
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6.1 Introduction n In this chapter, we learn: q New methods of using existing resources are the key to sustained long-run growth q Why “ nonrivalry ” makes ideas different from other economic goods q How the economics of ideas: n involves increasing returns n leads to problems with Adam Smith’s invisible hand q The Romer model of (endogenous) economic growth q How to combine the Romer and Solow models (in next lecture)
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The Romer Model 1 n The Romer model divides the world into: q Objects n capital and labor from the Solow model n these are finite q Ideas n items used in making objects n these are virtually infinite n This distinction forms the basis for modern theories of economic growth n Sustained economic growth occurs because of new ideas .
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6.2 The Economics of Ideas
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Non-rivalry : Excludability : Non-rivalry
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Returns to Scale 1 n Increasing returns to scale: q Average production per dollar spent is rising as the scale of production increases q Doubling inputs will more than double outputs q High fixed initial development costs n Constant returns to scale: q Average production per dollar spent is constant q Doubling inputs exactly doubles output q The standard replication argument implies constant returns to scale
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Returns to Scale 2 n Proof of increasing returns q Begin with the production function: q Multiply all inputs by a constant ( ! ): " # = % !& # , !( # , !) # = !) # (!& # +/- )(!( # //- ) = !! +/- ! //- ) # (& # +/- )(( # //- ) = ! / ) # (& # +/- )(( # //- ) q Output is multiplied by more than !
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Problems with Pure Competition 1 n Pareto optimal allocation q Cannot make someone better off without making someone else worse off q Perfect competition results in Pareto optimality because P = MC n Under increasing returns to scale, q A firm faces initial fixed costs and marginal costs.
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