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Chap. 2 Notes, Part 1

by: Ja'kayla davis

Chap. 2 Notes, Part 1 Econ. 222

Ja'kayla davis

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About this Document

Cover part of Exam 1
Principles of Macroeconomics
Dr. Chandini
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This 4 page Bundle was uploaded by Ja'kayla davis on Thursday February 25, 2016. The Bundle belongs to Econ. 222 at University of South Carolina taught by Dr. Chandini in Spring 2016. Since its upload, it has received 26 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.


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Date Created: 02/25/16
Chap. 2 Notes- Comparative Advantage, Market System and tradeoffs - What is a free market? i. Defn: Market where few govt. restrictions exist on a) how to produce or sell a good or service and b) way to use resources to produce good or service ii. Sign.: This market type produces better standards of living compared to central economies iii. Adam Smith- First wrote about this principle in his book “An Inquiry Into Nature and Causes of the Wealth of Nations “ - What is the market mechanism? Guiding notion behind itI i. Defn.: Mechanism shows forth that flexible pricing conglomerates decisions made by households & firms into relative worth of a good or service ii. Guiding notion: “ Invisible hand”- Personal decisions to buy goods and services manufacture consumer wants. - What is the circular flow diagram? Assumptions regarding it?Why is it important? i. Function : Show how two primary economic agents (households & firms ) are connected in markets ii. Assumptions (6) a. 2 economic agents: 1)households and 2) firms with no govt. involvement b. Closed economy- no international trade (imports & exports) c. Financial section non-existent (no borrowing or lending) d. Households & firms interact in only 2 types of markets: 1) product market, 2) factors of production market e. Factors of production market- The owners & sellers of resource markets are households; sell to firms f. Product market- The utilization of resources is done by firms; sell goods and services as output iii. See circular diagram in textbook for visual - What is a production possibilities frontier? How can we understand the impact of an increase in resources like labor and physical capital on it? i. Defn.: Production possibilities frontier: A graph shows the different combinations of production output of two goods given available resources and technology. Assumption: We are only focused on producing two goods ii. Scenario 1: Economically Self- Sufficient a. Economically self- sufficient- Production & consumption of goods is of one’s own merit; no trading arrangements exist b. Bob can produce either guns or butter c. Productivity Rate- How much of a good one can produce in an hour 1hr= 3 gun, and 1hrs= 5 butter; and he only has 24 hrs. in a day to produce d. Production Choices: 1) 72 guns and 0 butte (devotes all time to producing guns) , 2) 0 guns &120 butter (devotes all his time to producing butter) ,3) 36 guns and 60 butter (spends half his time producing guns and the other half on butter) e. PPF Drawing: Vertical Axis- Guns; Horizontal Axis- Butter (draw linear line from production choice A to B =ppf) F. Productivity Categorizations: 1) Efficient- Any point on PPF line (i.e. production choices) 2) Inefficient/ Infeasible- Any point within the line (under utilization of resources) 3) Unattainable- Any point beyond the ppf curve iii. Scenario 2: A machine is given that makes it easier to produce guns a. Physical capital- An extra resource limited to the production on one type of good b. Productivity Rates : 1hr.= 5 guns and 1 hr.= 5 butter c. Movement (ppf)- Only shifts up guns (vert. axis. Specifically production point A) to 120 iv. Scenario 3: A faster machine for manufacturing butter becomes available ( machine for improved gun making outdated) a. Physical capital- see above definition b. Productivity rates= 1hr.= 3 guns and 1 hr.= 7 butter c. Movement (ppf)- Only shifts butter outward (horizontal axis; specifically production point B) to 168 v. Scenario 4: You meet another person who possesses your same productivity rates a. Additional labor: Helps support specialization (assuming exact productive rates ppf will still be linear) Economic growth- Production of more goods contingent upon more consumption; hence we are better off as a society b. Productivity Rates= 1 hr. = 3 guns and 1 hr.= 5 butter (both ppl) c. Production Choices: 1) 144 guns and 0 butter 2) 0 guns & 240 butter, 3) 72 guns and 120 butter d. Movement (ppf)- Entire ppf shifts outward to the right (b/c of specialization) ; increase in vertical and horizontal axis (144- guns -production point A ; 240 butter- production point B). - PPFs for Firms/ Countries? 1. Example: See lect. Notes for Tesla vs. Sedan Example i. PPF Line= individuals ii. Constant Opt. cost- Only holds for condition that resources are equally proficient in producing sedans & suvs.; opt. cost will remain the same regardless of number produced (see example) - What are increasing marginal opportunity costs and their significance? i. Increasing Marginal Oppt. Cost- The opt. cost of making one product results in greater and greater reduction in production of another product. ii. Significance? Some resources are more equipped to perform one or more tasks than others. a. “First” resource used to switch are the best ones suited to “ switch”. b. The greater the amnt. Of resources devoted to an activity, smaller the payoff to devote additional resources to that activity. - What is the significance on economic growth for a ppf? 1. Economic growth- Ability of the economy to increase production. 2. Sign.- More econ. Resources become available; economy moves outward (visually) on ppf from production point A to production point B a. Shift outward (ppf)- represents more production, hence economic growth. - How does technological change impact a ppf? 1. Technology increases production (shift to a greater amnt. Of goods on whatever axis that the good lies which technology has impacted) - When does the ppf ever shift left ward or down (horizontal or vertical axis) 1. When destruction of resources occurs ; only instances would be like a natural disaster (Hurricane Sandy) or tragedy (arson) - How can gains be made from specialization and trade? 1. Economically self- sufficient- Consumption and production of goods depends on one’s own effort. 2. Economic interdependence- Trade with other with products that each one specializes in making (comparative advantage). i. Why is it widely accepted? B/c ppl are better off materially. Results in greater total output and consumption. - What are some important concepts regarding trade? 1. Production Possibilities Frontier- A graph showing various combinations of output for two products that can be produced with available resources & technology. i. Differences a. Straight- line ppf: shows resources can be alternated in use from one good to another at a constant rate. b. Bowed out line ppf: shows resources cannot be alternated in use from one good to another at a constant rate. 2. Oppt. Cost- What is given up in order to get something (highest valued alternative) 3. Imports- Goods that are produced abroad yet brought in for national sale 4. Exports- Goods that are produced domestically and yet sold internationally 5. Markets- Place where trade takes place. - What is absolute advantage ? Its significance to trade? 1. Abs. Advantage- When given the same amnt. Of resources or time one country is able to produce more or in less time than another country. i. Productivity Rates- How much of a good a party can produce in a given hour ii. Usually there is an amnt. Of time for production that is compared b/tw the two parties. 2. However even if one party has an absolute advantage in both goods it still behooves them to trade i. See example in lecture notes for details - What is comparative advantage? It’s significance to trade? 1. Comparative advantage- When one party has the ability to produce more than the other party of a good. 2. Example: see lecture notes - How do we know a party will gain from trade when they have an absolute advantage in both goods? Goal : Find a production point for that person outside their lone ppf 1. Determine opt. costs for comparative advantage i. Equalize time (in 1 hr.) for each good for each part a. Example: 8h= 1 (lb.) of potatoes & 8h= 1 (lb.) of meat Opt. cost= 1(lb.) pototatoes= 8 (lbs.) of meat ii. Solve for opt. cost in term of what you are giving up (in this case meat) Opt. cost 1 (lb.) meat= 1/8 (lbs.) potatoes iii. The lower opt. cost producer of potatoes has comparative advantage in potatoes. iv. The lower opt. cos t producer of meat has a comparative advantage in meat.


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