Chapter 6 - Handout.pdf

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

• Notes
• 35

This preview shows page 1 - 8 out of 35 pages.

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

Subscribe to view the full document.

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)
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 .

Subscribe to view the full document.

6.2 The Economics of Ideas
Non-rivalry : Excludability : Non-rivalry

Subscribe to view the full document.

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
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 !

Subscribe to view the full document.

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.
You've reached the end of this preview.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern