Topic 3: Technological change,

Population, and Growth

ECO 1001: Introduction to Economics (Spring 2023)
Dr. Ayush Pant
 Topic 2: The recent rapid, sustained
increase in income and living
standards is largely due to
technological progress.

The context for this

However, these major changes
started very suddenly - 250 years

topic ago.

• How did the technological

revolution start?

• Why did it not start earlier?

 This topic

We will try to find an answer in the rapid growth in real wages and population in the
last two centuries, and the stagnation in the centuries before that. We do so using a
simple economic model.
OUTLINE
A. Economic
models
 Why do we need models?

o What happens in an economy/real-world depends on the

actions and interactions of millions of people.

o We use models to isolate a chain of thought and see the

big picture.

• To create an effective model, distinguish between

A quick the essential features of the economy that are
review relevant to the question we want to answer, which
should be included in the model and the
unimportant details.
o Models necessarily omit many details – assumptions.
This is their feature, not a bug.

o Did we see any model in the previous topic?

Building a model
• Capture the elements of the economy that we think
matter for our question.

• Describe how agents act, and how they interact with

each other and the elements of the model.

• Determine the outcomes of these actions – an

equilibrium. Equilibrium of a model is a situation that is
self-perpetuating. It does not change unless an external
force is introduced that alters the model's description
of the situation.

• Study what happens when conditions change. What is

this exercise called?
 It is clear: It helps us better understand
something important.

It predicts accurately: Its predictions are

What is a consistent with evidence or intuition.

good model? It improves communication: It helps us to

understand what we agree (and disagree) about.

It is useful: We can use it to find ways to improve

how the economy works.
Key concepts
• Less is more: Ceteris paribus is a simplification that involves "holding other things
(in/outside the model) constant”.

• Incentives are economic rewards or punishments that influence the benefits and costs of
alternative courses of action.

• Relative prices (of one alternative to another) help us compare the value of alternatives.

• Economic rent = benefit from the option taken – benefit from the next best option
(reservation option)
o Forms the basis of how we make choices. How?
B. Explaining
growth
Explaining the
Industrial Revolution

Why did the Industrial Revolution happen first in the

18th Century on an island off the coast of Europe?
There are many alternative explanations:
• Relatively high cost of labor and cheap local
sources of energy
• Europe’s scientific revolution and Enlightenment
• Political and cultural characteristics of nations
• Cultural attributes such as hard work and savings
• Abundance of coal and access to colonies

Why don’t we have a definitive answer?

 Modeling technology
What is technology?
Technology: A process that uses inputs to produce an output.

• There are 5 different ways to produce 100 meters

of cloth using labor (number of workers) and
energy (tonnes of coal) as inputs.
• What can you say about these technologies?
o Technology A is energy (capital)-intensive and
technology E is labor-intensive.
• Firm’s choice: To choose one of these
technologies.
o Which technology will (not) be chosen?
Firm’s choice:
Technologies
to produce
output
Firm’s choice:
Technologies
to produce
output

A dominates C.
Firm’s choice:
Technologies
to produce
output

B dominates D.
Firm’s choice:
Technologies
to produce
output

E does not
dominate.
 Firm’s objective: Minimizing costs
Usually, we assume firms want to maximize profits = minimize costs.
• Here, it means producing a given cloth length at the least possible
cost.
o Thus, we could easily compare A with C and B with D, but we cannot say
anything about A v. B (v. E).
o How can we make this final comparison?

• We will see that the firms’ choice of technology depends on the

(economic information about) relative prices of inputs.
 Firm’s objective: Minimizing costs

Wage per Price per

worker ton of coal

Total cost of 𝑐 = 𝑤 × 𝐿 + (𝑝 × 𝑅)
production

Number of Number of
workers tons of coal

In what space should we construct our cost function? How does it look like?
 Firm’s objective: Isocost line
• Fix 𝑐, the total cost of production, at 𝑐.ҧ Express 𝑅 as a function of 𝐿.
What do you get?

𝑐ҧ 𝑤
𝑐ҧ = 𝑤 𝐿 + 𝑝 𝑅 ⟺ 𝑅 = − 𝐿
𝑝 𝑝

Equation of a straight line: 𝑦 = 𝑎 + 𝑏𝑥 where 𝑎 is the intercept and 𝑏 is

the slope of the line.
𝑐 𝑤
• is the intercept term and , or the relative price, is the slope.
𝑝 𝑝
Firm’s objective: Isocost line

• Here, 𝑤 = £10 and 𝑝 = £20.

• Given a 𝑐ҧ (here £80) , and

prices of workers and coal,
𝑤 and 𝑝, I can find you the
combinations of 𝐿 and 𝑅
that will yield the same cost
of production.
Firm’s objective: Isocost line

• How can one represent

higher (or lower) costs for
given relative prices?

• Higher cost 𝑐 for a given

set of prices, translates into
bigger intercepts.
Change in relative prices in Britain

• Imagine 𝑤 = £10 and (𝑝 = £20 → 𝑝′ = £5).

• Technology was labor-intensive before
the Industrial Revolution (technology B).
• Increase in wages relative to price of coal
in Britain create the incentive to innovate
more capital-intensive technologies
(technology A).
• Note how A and B have become
comparable now!
The benefits of “innovation”
• Because relative prices of inputs changed, a firm that
will switch to the new cost-minimizing technology will
have an advantage over its competitors.

Profits = revenues – costs

• The change in profit is equal to the fall in costs

associated with adopting the new technology.
o What is this change in the profits called?

o A form of economic rent called the innovation rent.

Schumpeter’s creative
destruction
• The first adopter is called an entrepreneur.

• The first adopters will enjoy Schumpeterian

(innovation) rents, but these will gradually vanish as
other firms adopt the new technologies.

• Creative destruction: The process by which old

technologies and the firms that do not adapt are
swept away by the new, because they cannot
compete in the market.
 One of the first sectors to undergo technological
change was textiles.

• Before the Industrial Revolution, making clothes

Technological for the household were time-consuming tasks.
change in • By the late 19th century, a single spinning mule
Industrial operated by a very small number of people

Revolution could replace more than 1,000 spinsters.

• These machines were powered by water wheels

and later coal-powered steam engines instead
of using human labor.
Why was Britain first?
English wages were higher
than wages elsewhere, and
coal was cheaper in Britain
than in the other countries
(early 1700s).
Why was Britain first?

English wages relative coal

(the cost of energy) rose in
the 18th century compared to
other historical periods.
 Shift to a lower-cost technology
The combination of capacity to innovate and changing relative prices of inputs led to a switch to energy-intensive technology.
C. Explaining
Stagnation
 We need a different model to
explain the stagnation in
population and living
standards before 18th
century.

Explaining economy before

the Industrial Revolution
 (Farmers’) Production Function

In general, 𝑦 = 𝑓 𝑥 where 𝑦 is the maximum output that can be produced for a set
of inputs 𝑥 for a given level of technology. Difference from the previous case?
 Diminishing average product of labor

Point A on the production function shows the output of grain produced by 800
farmers.
 Diminishing average product of labor

Point B on the production function shows the amount of grain produced by 1,600
farmers.
 Diminishing average product of labor

At A, the average product of labor is 500,000 ÷ 800 = 625 kg of grain per farmer. At
B, the average product of labor is 732,000 ÷ 1,600 = 458 kg of grain per farmer.
 Diminishing average product of labor

The slope of the ray to point A is steeper than to point B. At point A it is 625, and at
point B it is 458. Why do we draw the slope as such?
 Diminishing average product of labor
• As more farmers work on a fixed amount of land, the average product of
labor falls → Diminishing average product of labor.
Should we call this the law of diminishing average product of labor?
o NO! Because this is merely an implication of the assumption of concave production
function.
o Is this a good assumption?

• Diminishing average product of labor can be caused by:

o more labor devoted to a fixed quantity of land, or
o more (inferior) land brought into cultivation.
 Malthus’ model
• Population expands if living standards
increase.

• But diminishing average product of labor

implies that as more people work on the
land, their income will inevitably fall.

• In equilibrium, living standards (income)

will be forced down to subsistence level.

• Income will stay constant. Population

can settle at a similar level.
Malthus’ “Law”
• Model predicts a self-
correcting response to new
technology.

• In the long run, an increase

in productivity will result in
increased population but not
increased wages.
Was Malthus correct?

• The relationship between real

wages and population in
England between 1280-1600
show evidence of this
“Malthusian trap”.
• But what about the
subsequent “hockey-stick”
growth?
 • 3 conditions are required to stay in the
Malthusian trap:

1. Diminishing average product of labor.

2. Rising population in response to

increases in wages.
Revising 3. An absence of improvements in
Malthus’ Law technology to offset the diminishing
average product of labor.

• The permanent technological revolution

meant that third condition no longer held and
explains why Britain was able to escape the
Malthusian trap.
Escaping the Malthusian trap
Summary
In the next
unit