Eco2003F: notes from lectures
Quasilinear utility function
MRT uses the chain rule.
Voluntary exchange: bargaining
How they divide surplus depends on:
- Reservation option
- Bargaining power between parties (depends on intuitions- rules of the game)
When MRS doesn’t equal MRT the equilibrium into stable. Stable equilibrium= MRS=MRT
Marginal product of labour= the change in output that results from employing an added
unit of labour.
Driving factor behind intergenerational elasticity in RSA = categorical inequality
Eco2003F: notes from the textbook
Property and Power: Mutual gains and conflict
5.1 Institutions and Power
Institution= written and unwritten rules that govern:
- what people do when they interact in a joint project
- the distribution of the products of their joint effort
institutions = rules of the game
Rules of the game affect:
1
, - how the game is played
- the size of the total payoff available to those participating
- how this total is divided
Power= the ability to do and get the things we want in opposition to the intentions of
others.
Power in economics main forms:
- set the terms of an exchange
E.g. y making a take-it-or-leave-it offer (ultimatum game)
- impose / threaten to impose heavy costs
E.g. Unless the other party acts in a way that benefits the person with power.
Bargaining power= extent of a person’s advantage in securing a larger share of the
economic rents made possible by an interaction.
The power to make a take-it-or-leave-it offer gives the Proposer more bargaining power and
usually results in the them getting more than half of the pie. The Proposer’s bargaining
power is limited because the Responder has the power to refuse.
2 Responders (the power to refuse is weaker) = Proposer’s bargaining power is increased.
In the labour market - the power to set the terms of the exchange typically lies with those
who own the factory or business. Those seeking employment are like Responders, and since
usually more than one person is applying for the same job, their bargaining power may be
low.
5.2 Evaluating institutions and outcomes: The Pareto criterion
Allocation= description of who does what, the consequences of their actions, and who gets
what as a result.
E.g. In the ultimatum game the allocation describes the proposed division of the pie by the
Proposer, whether it was rejected or accepted, and the resulting payoffs to the two players.
Pareto criterion= a desirable attribute of an allocation is that it be Pareto-efficient.
According to the Pareto criterion, allocation A dominates allocation B if at least one party
would be better off with A than B, and nobody would be worse off. We say that A Pareto
dominates B.
2
,The Pareto criterion does not tell us which of the Pareto-efficient allocations is better. It
does not give ranking.
Pareto dominant= allocation A Pareto dominates allocation B if at least one party would be
better off with A than B, and nobody would be worse off.
1. (I, I) lies in the rectangle to the north-east of (T, T), so an outcome where both Anil
and Bala use IPC Pareto dominates one where both use Terminator.
2. If Anil uses Terminator and Bala IPC, then he is better off but Bala is worse off than
when both use Terminator. The Pareto criterion cannot say which of these
allocations is better.
3. None of the other allocations lie to the north-east of (I, I), so it is not Pareto
dominated.
4. (I,T) and (T,I) Neither of these allocations are Pareto dominated, but they do not
dominate any other allocations either.
The Pareto criterion may be of limited help in comparing allocations. Here, it tells us only
that (I, I) is better than (T, T).
Pareto efficiency= allocation that is not Pareto dominated by any other allocation.
If an allocation is Pareto efficient, then there is no alternative allocation in which at least
one party would be better off and nobody worse off.
3 of the 4 allocations are pareto efficient.
If an allocation is Pareto efficient, this does not mean we should approve of it.
Pareto efficiency has nothing to do with equality
Example of pareto efficiency with pie allocation:
3
, 3 friends win a pie. It would be pareto efficient if they cut it in 3 pieces and all had pie. It
would also be pareto efficient if they cut it in 2 pieces and left the one person out. The
reason it is pareto efficient is because the third person isn’t actually missing out on
anything.
5.3 Evaluating institutions and outcomes: Fairness
Allocations can be judged unfair because of:
- How unequal they are
E.g. In terms of income or subjective wellbeing.
These are substantive judgements of fairness.
- How they came about
E.g. by force, or by competition on a level playing field.
These are procedural judgements of fairness.
substantive judgements of fairness= judgements based on the characteristics of the
allocation itself, not how it was determined. To determine this all you need is the allocation.
SJOF are based on inequality in some aspect of the allocation such as:
- Income: The reward in money (or some equivalent measure) of the individual’s
command over valued goods and services.
- Happiness: Economists have developed indicators by which subjective wellbeing can
be measured.
- Freedom: The extent that one can do (or be) what one chooses without socially
imposed limits.
procedural judgements of fairness = an evaluation of an outcome based on how the
allocation came about, and not on the characteristics of the outcome itself (E.g. how
unequal it is). To determine PJOF we need the allocation, the rules of the game and other
factors that explain why this allocation occurred.
The rules of the game that brought about the allocation may be evaluated according to
aspects such as:
- Voluntary exchange of private property acquired by legitimate means: Were the
actions resulting in the allocation the result of freely chosen actions by the
individuals involved.
E.g. each person buying or selling things that they had come to own through
inheritance, purchase, or their own labour? Or was fraud or force involved?
- Equal opportunity for economic advantage: Did people have an equal opportunity to
acquire a large share of the total to be divided up, or were they subjected to some
kind of discrimination/other disadvantage because of their race, sexual preference,
gender, or who their parents were?
4
Quasilinear utility function
MRT uses the chain rule.
Voluntary exchange: bargaining
How they divide surplus depends on:
- Reservation option
- Bargaining power between parties (depends on intuitions- rules of the game)
When MRS doesn’t equal MRT the equilibrium into stable. Stable equilibrium= MRS=MRT
Marginal product of labour= the change in output that results from employing an added
unit of labour.
Driving factor behind intergenerational elasticity in RSA = categorical inequality
Eco2003F: notes from the textbook
Property and Power: Mutual gains and conflict
5.1 Institutions and Power
Institution= written and unwritten rules that govern:
- what people do when they interact in a joint project
- the distribution of the products of their joint effort
institutions = rules of the game
Rules of the game affect:
1
, - how the game is played
- the size of the total payoff available to those participating
- how this total is divided
Power= the ability to do and get the things we want in opposition to the intentions of
others.
Power in economics main forms:
- set the terms of an exchange
E.g. y making a take-it-or-leave-it offer (ultimatum game)
- impose / threaten to impose heavy costs
E.g. Unless the other party acts in a way that benefits the person with power.
Bargaining power= extent of a person’s advantage in securing a larger share of the
economic rents made possible by an interaction.
The power to make a take-it-or-leave-it offer gives the Proposer more bargaining power and
usually results in the them getting more than half of the pie. The Proposer’s bargaining
power is limited because the Responder has the power to refuse.
2 Responders (the power to refuse is weaker) = Proposer’s bargaining power is increased.
In the labour market - the power to set the terms of the exchange typically lies with those
who own the factory or business. Those seeking employment are like Responders, and since
usually more than one person is applying for the same job, their bargaining power may be
low.
5.2 Evaluating institutions and outcomes: The Pareto criterion
Allocation= description of who does what, the consequences of their actions, and who gets
what as a result.
E.g. In the ultimatum game the allocation describes the proposed division of the pie by the
Proposer, whether it was rejected or accepted, and the resulting payoffs to the two players.
Pareto criterion= a desirable attribute of an allocation is that it be Pareto-efficient.
According to the Pareto criterion, allocation A dominates allocation B if at least one party
would be better off with A than B, and nobody would be worse off. We say that A Pareto
dominates B.
2
,The Pareto criterion does not tell us which of the Pareto-efficient allocations is better. It
does not give ranking.
Pareto dominant= allocation A Pareto dominates allocation B if at least one party would be
better off with A than B, and nobody would be worse off.
1. (I, I) lies in the rectangle to the north-east of (T, T), so an outcome where both Anil
and Bala use IPC Pareto dominates one where both use Terminator.
2. If Anil uses Terminator and Bala IPC, then he is better off but Bala is worse off than
when both use Terminator. The Pareto criterion cannot say which of these
allocations is better.
3. None of the other allocations lie to the north-east of (I, I), so it is not Pareto
dominated.
4. (I,T) and (T,I) Neither of these allocations are Pareto dominated, but they do not
dominate any other allocations either.
The Pareto criterion may be of limited help in comparing allocations. Here, it tells us only
that (I, I) is better than (T, T).
Pareto efficiency= allocation that is not Pareto dominated by any other allocation.
If an allocation is Pareto efficient, then there is no alternative allocation in which at least
one party would be better off and nobody worse off.
3 of the 4 allocations are pareto efficient.
If an allocation is Pareto efficient, this does not mean we should approve of it.
Pareto efficiency has nothing to do with equality
Example of pareto efficiency with pie allocation:
3
, 3 friends win a pie. It would be pareto efficient if they cut it in 3 pieces and all had pie. It
would also be pareto efficient if they cut it in 2 pieces and left the one person out. The
reason it is pareto efficient is because the third person isn’t actually missing out on
anything.
5.3 Evaluating institutions and outcomes: Fairness
Allocations can be judged unfair because of:
- How unequal they are
E.g. In terms of income or subjective wellbeing.
These are substantive judgements of fairness.
- How they came about
E.g. by force, or by competition on a level playing field.
These are procedural judgements of fairness.
substantive judgements of fairness= judgements based on the characteristics of the
allocation itself, not how it was determined. To determine this all you need is the allocation.
SJOF are based on inequality in some aspect of the allocation such as:
- Income: The reward in money (or some equivalent measure) of the individual’s
command over valued goods and services.
- Happiness: Economists have developed indicators by which subjective wellbeing can
be measured.
- Freedom: The extent that one can do (or be) what one chooses without socially
imposed limits.
procedural judgements of fairness = an evaluation of an outcome based on how the
allocation came about, and not on the characteristics of the outcome itself (E.g. how
unequal it is). To determine PJOF we need the allocation, the rules of the game and other
factors that explain why this allocation occurred.
The rules of the game that brought about the allocation may be evaluated according to
aspects such as:
- Voluntary exchange of private property acquired by legitimate means: Were the
actions resulting in the allocation the result of freely chosen actions by the
individuals involved.
E.g. each person buying or selling things that they had come to own through
inheritance, purchase, or their own labour? Or was fraud or force involved?
- Equal opportunity for economic advantage: Did people have an equal opportunity to
acquire a large share of the total to be divided up, or were they subjected to some
kind of discrimination/other disadvantage because of their race, sexual preference,
gender, or who their parents were?
4
