Week 2 - Principles of Microeconomics Reading Notes
Week 2 - Principles of Microeconomics Reading Notes ECON:1100:0AAA
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This 2 page Class Notes was uploaded by Kelsy Lartius on Tuesday February 3, 2015. The Class Notes belongs to ECON:1100:0AAA at University of Iowa taught by Stacey Brook in Spring2015. Since its upload, it has received 126 views. For similar materials see Principles of Microeconomics in Economcs at University of Iowa.
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Date Created: 02/03/15
Microeconomics Week 2 Reading Notes Chapter 3 Reading Interdependence and the Gains from Trade A Parable for the Modern Economy 0 Production Possibilities 0 production possibilities frontier shows all the possible outcomes 0 if the producers choose to be selfsufficient rather than trade with each other then each consumes exactly what he or she produces I so in this case the production possibilities frontier is also the consumption possibilities frontier o Specialization and Trade 0 Specializing in one area allows producers to trade and in result be able to consume more without working anymore hours Comparative Advantage The Driving Force of Specialization 0 Absolute Advantage 0 find out the cost of production by comparing the inputs required by the producers o absolute advantage the ability to produce a good using fewer inputs than another producer 0 the producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good 0 Opportunity Cost and Comparative Advantage o opportunity cost whatever must be given up to obtain some item 0 comparative advantage the ability to produce a good at a lower opportunity cost than another producer 0 the producer who gives up less of other goods to produce Good X has the smaller opportunity cost of producing Good X and is said to have a comparative advantage in producing it o impossible for one producer to have a comparative advantage in both goods 0 comparative advantage reflects the relative opportunity cost 0 Comparative Advantage and Trade 0 when each producer specializes in producing the good for which they have a comparative advantage total production in the economy rises I this increase can be used to make everyone better off 0 Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage 0 The Price of Trade 0 For both parties to gain from trade the price at which they trade must lie between the two opportunity costs Applications of Comparative Advantage 0 Should Tom Brady Mow His Own Lawn 0 Because Tom Brady is one of the most talented football players of all time he is likely talented at other physical activities as well 0 Let s say Brady can mow his lawn faster than anyone else butjust because he can mow his lawn faster does this mean he should mow his own lawn 0 Brady can mow his lawn in 2 hours Or in 2 hours he could film a TV commercial and earn 20k 0 His next door neighbor can mow the lawn in 4 hours Or the boy could work at McDonald s for 4 hours and make 40 0 in this example Brady has an absolute advantage in mowing lawns bc he can do the work with a lower input of time but his opportunity cost is 20k while the boy s is only 40 so the boy has a comparative advantage lower opportunity cost in mowing lawns 0 As long as Brady pays the boy more than 40 and less than 20k both of them are better off 0 Should the United States Trade with Other Countries 0 imports goods produced abroad and sold domestically o exports goods produced domestically and sold abroad
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