Principles of

Microeconomics (Econ 111-

S1)
Recitation 2

Verda Arif
List of topics we'll discuss today:
• How to plot Lorenz curve and calculate the Gini index.
• What is a production function?
• The difference between Endogenous vs Exogenous variables?
• Changes in the graphs- movement along vs shift in the curves.
• Difference between APL and MPL.
• Introduction to the Malthusian economy- key features, assumptions
and diagram set up of the model.
Gini Index and Lorenz curve Facts to remember
(summary)
• The Gini index/coefficient is a tool for measuring income disparity within a country
and is based on the Lorenz curve.
• The Lorenz curve is the plot of actual income data in the X-Y space where:
X-axis has cummulative share of population arranged from poorest (left) to the
richest (right)
Y-axis has cummulative share of Income (Market income or Disposable income)
• The Gini index has a range of 0-1 where:
GI of 0 - perfect equality
GI of 1- perfect inequality
• Graphically:
GI (ratio) = Area between the Lorenz curve and line of perfect equality/ Area below
the line of perfect equality
Diagrammatic arrangement of a Lorenz curve:
 Gini coefficient calculation from a graph
• Gini coefficient formula:
Area between Lorenz curve and line of perfect equality / Total Area below
the line of perfect equality
Or
Gini index = A/(A+B)

*Further away the plot of Lorenz curve is from the Line of perfect equality,
greater the area A, hence greater the value of Gini Index– greater income
inequality.
Example
In-class practice questions for concept applicability:
In-class practice questions for concept applicability:
Income Inequality- Practice Question on Lorenz curve plot and
Gini coefficient calculation:
Solution
Some preliminary things to note before we start Malthusian model
• What is a production function? What are the components of a production
function:
q = AF(L,La)
• Fixed input vs Variable input
• Plot of a production function (graphically)
• Difference between Marginal Product of Labor (MPL ) and Average Product of
Labor (APL )
• Revisit the production function drawn graphically, via intuition, explain why does
output increase at a decreasing rate?
• How do we verify diminishing returns using APL and MPL?
• *Endogenous vs Exogenous variables (movement along the curve vs shifts in the
curve) eg. a one time favorable technological shock
 Malthusian Economy
• Key results:
1) Economy is stagnant at a low output level
2) Technological shocks can only break the trap temporarily until economy returns to this
equilibrium defined as subsistence level
• Key features:
1) Theory of production
2) Theory of population
• Key assumptions of Malthus framework/model:
1) Agricultural economy (one output and two inputs- Land is fixed, Labor is variable) so production
is defined by diminishing returns
2) Inverse relationship between population and output, why?
3) Population(levels) is a positive function of Living standards which in turn are a positive function
of Income.
4) Birth rates positively depend on Living standards while Death rate negatively depend on Living
standards so population growth depends on differential between two rates (+ve, -ve, constant).
 Malthusian model- set up:

Q.1 Why is graph 1 (left) a downward sloping line?

Q.2 Why is graph 2 (right) an upward sloping line?
Case 1:
Case 1: Settling for an equillibrium
Case 2:
Case 2: