Big Push Theory free essay sample

The modern sector requires F workers for administrative tasks, but the remaining workers produce more than one unit of goods per worker. This is depicted in the figures, where T is the production in the traditional sector an M the production in the modern sector. The way it is drawn, production is higher with modern than with traditional technology if we have L/N workers. In the traditional sector, workers get paid one unit of goods for their work which they spend equally in all sectors. Hence if all workers are working in the traditional sector, demand towards all sectors is Q1=L/N. In the modern sector they get paid more. Each worker costs w, which we will look at more closely. Consider first w1, which is a low wage. A firm facing demand Q1 will require L’ workers of it choose the modern technology. This will cost w1L’, and earnings will be Q1. We will write a custom essay sample on Big Push Theory or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The way w1 was chosen, we see that w1L’Q1. Hence the firm will not choose to modernize if nobody else does. If all the others have modernized, though, the firm faces demand Q2. In that case, it will choose to modernize as well. This is because it would now make a profit as w2 is chosen so that w2L/NQ2. This case is shown in Fig. 5. 2 in the book. The most interesting case is w2 though. Then we have a coordination problem as firms want to modernize if everybody else does, but they do not want to be the first to modernize. Hence we can get both a modern and a traditional equilibrium.