INTRODUCTION TO

ECONOMICS
Economic growth

Economic growth is
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Often measured by the rate of change of real GDP

It measures net output in an economy by
measuring goods and services bought with money .

although this has many deficiencies

it omits output that is not bought/sold

e.g. leisure, pollution, congestion

it also neglects income distribution

so higher GDP per capita does not necessarily

mean greater happiness

but it helps.

The production
function...

shows the maximum output that can be

produced using specified quantities of
inputs, given existing technical
knowledge
Output = f(capital ,
labour,

materials ,

land ,

raw
technology)

Increasing output
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Capital: is the stock of machines, buildings,

inventories.

output per worker may increase with capital per

worker.

Labour, employment can rise for 2 reasons:

1.
2.
.
.
.

population growth
Larger fraction of the population may have jobs.
Labor inputs depends on hours worked per person.
More hours worked raises effective real input
raising output.
Human capital is the skill and knowledge embodied
in the minds and hands of workers. education ,
training and experience allow workers to make
more outputs.

Increasing output
5

Land

fixed supply, but quality may be improved

using more fertilizers, investments in
irrigation and deserts can make it more
productive.

Increasing output (2)

6

Raw materials

important distinction between

depletable

resources (coal, oil) can be used

only once.
renewable resources (timber, fish) can be
used again

Technical knowledge

inventions, R&D

Economies of scale may reinforce the

long-run growth process

Economies of scale
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Economies of scale may reinforce the

long-run growth process
If all inputs are doubled, and output
exactly doubles these are constant
return to scale.
If all inputs are doubled, and output
more than doubles these are increasing
return to scale.
If all inputs are doubled, and output less
than doubles these are decreasing
return to scale.

Technical knowledge
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The state of technical knowledge changes

through time because of:

Inventions (discovery of new knowledge ):

Examples: the replacements of animal power
by machines, development of irrigation,
..etc. all played part in economic growth
Innovation : the incorporation of knowledge
into actual production techniques.
learning by doing: with practice workers get
better at doing a particular job

Research and development (R&D)

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Research and development (R&D)

The output of new ideas depend on the
resources devoted to looking for them.
Research activities is priveatly funded or
funded by the government,

patent systems address a market failure

which otherwise would lead to there being
too little R&D.