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Module 1: Intro and Comparative Advantage

by: Charles Notetaker

Module 1: Intro and Comparative Advantage 601445

Marketplace > University of Cincinnati > Economcs > 601445 > Module 1 Intro and Comparative Advantage
Charles Notetaker
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Econ 7000 Foundations in Economics
Michael Jones, PhD

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General notes - Opportunity cost, comparative advantage, sunk cost, versions of lecture diagrams.
Econ 7000 Foundations in Economics
Michael Jones, PhD
Class Notes
Econ intro, Opportunity Cost




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This 0 page Class Notes was uploaded by Charles Notetaker on Friday January 22, 2016. The Class Notes belongs to 601445 at University of Cincinnati taught by Michael Jones, PhD in Spring 2016. Since its upload, it has received 15 views. For similar materials see Econ 7000 Foundations in Economics in Economcs at University of Cincinnati.


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Date Created: 01/22/16
Intro to Economics and Comparative Advantage Benefit vs Cost 3 0quot 8 Describe and apply marginal analysis Define opportunity cost sunk cost economics microeconomics and macroeconomics Create a production possibilities frontier PPF based on inputs outputs and technology Calculate opportunity costs for a particular good Identify factors that expand or contract a PPF Explain and calculate absolute advantages and comparative advantages in international trade ls economics useful a Canada Raises 527 billion from wireless spectrum auction b Allows for forecasting behavior analysis 0 Created a match algorithm Match medical residence with hospitals Ben Bernanke Did not predict outcome of his policies We will not cover matching algorithms but we will learn concepts and theories to help be a better manager and citizen We will also learn economists approach and method of solving problems SCARCITY Limited nature of resources Economic Study of how society manages its scarce resources a Instructor likes this definition better There is only one difference between a bad economist and a good one the bad economist confines himself to the visible effect the good economist takes into account both the effect that can be seen and those effects that must be foreseen Frederic Bastiat What is Seen and What is not Seen Essay MARGINAL ANALYSIS Making decisions requires comparing costs and benefits of alternative choices OPPORTUNITY COST ls whatever must be given up to obtain it it is the relevant cost for decision making a SHORT VERSION What you are sacrificing what you are gaining OC b Per Prof i Divide the change in of units on Y axis by the change in of units on X axis This will give you the cost of the good on the X axis ie How many units of the good on Y axis in order to produce one more unit on X c Deciding to get an MBA Don t think about cost itself think about what you gave up d Economists Think at the margin If the additional benefit of producing or purchasing one more item exceeds the cost then the decision should be taken I SUNK COST Costs that have already occurred and should NOT in uence vour decision making a You arrive at the theater and realize you lost your 20 ticket Do you buy another ticket and see the play anyway You make your decision quotAt the marginquot by asking yourself regardless of the lost 20 ticket is this movie worth seeing now Would you pay 20 to see the movie i Do not factor in that you spent 20 already It does not add up to a 40 ticket b Make your decision at the margin 9 Models representations of real world used to illustrate concepts a Typically compare two goods as an example b Created to make complex situations appear more simplistic c Ceteris Paribus an assumption that factors other than those being considered do not change Only going to focus on model at hand Assume all other goods stay the same 10 People respond to incentives they maximize utility a Utility Happiness Pleasure etc b People systematically and purposefully to the best they can to achieve objectives c because they weigh costs and benefits their decisions are purposeful or rational not random or chaotic i Gas prices rise gt They buy hybrid cars ii Because people respond to incentives they respond to legislationbusiness promotions in ways not intended 1 Economics is the study of unintended consequence 11 12 MlCROEconomics How individual people decide what to buy how much to work save and spend How individual firms decide how much to produce how many workers to hire 13 MACROEconomics The of economy wide phenomena inflation unemployment and economic growth 14 Marginal Benefit vs Marginal Cost Should I do activity X a Cx the costs of doing x b Bx the bene ts of doing x c If Bx gt Cx do x otherwise don39t 15 Economic Surplus The difference between the bene t and cost If it39s negative don39t do x a Lecture example Should the college make the class bigger or add another class i Bx The bene t to the university is it reduces the cost per student ii Cx The cost is students may not enroll or leave school because low quality if education iii Largest cost is Faculty salary and lets assume 10000 per course The Per student faculty salary cost 1 8 sections 10000 Faculty cost 25 students 400 versus 2 1 section 10000 Faculty cost 200 students 50 3 So the bene t of increasing from 25 to 200 is 400 50 or a Bx of 350 4 If you were in a class with 25 students how much would you be willing to pay to avoid going to a class with 200 students ls Cx desire to leave lt 350 then the college should offer the larger class iv This assumes a lot but it does help frame the benefit of the course 16 Accounting profit is not the same as economic profit because econ profit considers OPPORTUNITY COSTs or the loss of potential gains based on other decisions a Do NOT just look at financial statements because they miss those opportunity costs 17 Production Possibilities Frontier PPF based on inputs outputs and tech a JONES Landscape Need to know OUTPUTS lNPUTs and tech LAWHE 1 H i INPUTS 1 10 workers who work 10 hours per day 100hrs per day ii OUTPUTS 1 Lawns and trees we cut iii Technology is how we transfer inputs hours into outputscut lawns 1 1 manhour 1 lawn 2 4 manhours 1 tree iv To create PPF we create X and Y axis v Y is the of lawns we can cut vi X is the of trees we can cut Produotion Pmiiliites Frontier quoti39ioooll Enange in y oiioi lln tiltio iiiiliilii ii lawns inst meono iii ont one mote WEE ll up the opportunity to out 1i Tito Upp ll itilililiity llamas is the iooiprooall r LaIutnrio 1M tirooo llfll ont i lainn i up the oppoirttinitjir to out iii a troo 25 TREES 18 Y mxb Slope intercept form a Y good or service on Y b M Slope of lie C B Y intercept d Y 4x 100 e Because slope is negative I have to give up the opportunity to cut lawns if I out another tree Lawns 4trees 100 LAWMS H mm UNE E i l e x i l i femexes 1131 391 Atta nawe and lament tte nae it fragment 25 TEEEE 19 Increasing opportunity costs a Assumes all workers are interchangeable b If you are close to max output devoting additional resource to acquire other good it becomes very costly 20 What if you increase technology a Instead of 1 manhour 1 lawn and 4 manhours 1 tree b Now because you have a better mower eg Larger deck you can increase output 21 lNPUTs If you increase inputs you shift OUTward the PPF curve 22 CONCLUSIONS a Increases in technology drive economic growth shift outward b Increases in inputs also drive economic growth shift outward 23 meMs I j m Technology a I mainlmur 11 IIEl39ll39l lIE agar mower IIIEEI39E Al mainlmurs 12 threes ellElieiiter chainsaw 1 H Ii an 25 39 TEEES Increases in Tech MILWde slimming Increases in INPUTS ag Illullanllmurs also Whittade slimming NOTE in and inpum allow pth in be atlainable they not 24 COMPARATIVE ADVANTAGE How a country can consume more than it can produce 25 TRADE Cannot consume more than they can produce a Need to know OUTPUTSINPUTS and TECHNOLOGY i Lecture example compares US and Mexico Wheat and Corn production 1 US 50000 hours of labor INPUT a 1 ton corn 100hours of labor TECHNOLOGY b 1 ton of wheat 10 hours of labor TECHNOLOGY 2 Mexico 30000 hours of labor INPUT a 1 ton corn 125 hours of aborTECHNOLOGY b 1 ton of wheat 25 hours of aborTECHNOLOGY US Produces 3400 tons of wheat and 160 tons of corn Mexico produces 240 tons of corn but no wheat 0 The question is without technological or resource growth is it possible to consume outside the PPF See green points below b Consumption Under Trade i Suppose US Exports 700 tons of wheat to Mexico and imports 110 tons of corn 1 Mexico imports 700 tons of wheat from US and Exports 110 tons of corn 2 The price of corn is 700110 or 636 tons of wheat ii How much of each good is consumed in US Mexico iii How much wheat is given up to obtain a ton of corn WHEAT WHEAT satin 12W ft d t Emma quot 1313 F j Ft F l t i page 5W 24a US MEKI C c CONSUMPTION amount produced amount imported amount exported US Consumption Mexico Consumption UnderTrade UnderTrade Cor Whea Cor Whea n t n t 16 340 24 Produced O O Produced O O 11 imported O O imported O 700 11 H Exported O 700 H Exported O O 27 270 13 Consumed O O Consumed O 700 See green points 2702700 and 130 700 on production possibilities curve This means under trade countries CAN consume more than they produce So with no increase in tech or inputs 26 27 28 29 30 31 32 33 34 35 Absolute advantage The ability to produce the same amount of a good with fewer inputs than another a US has an absolute advantage in both wheat and corn so why import b Absolute advantage measures the cost of a good in terms of the inputs required to produce it i Another measure of cost is Opportunity Cost The opportunity cost of a ton of corn is the amount of wheat that could be produced using the labor needed to produce one ton of corn COMPARATIVE ADVANTAGE The ability to produce a good at lower opportunity cost than another producer a Gains from trade arise from comparative advantage The economic pie is bigger and all countries can gain from trade Comparative advantage and trade Gains from trade arise from comparative advantage differences in opportunity costs a When each country specializes in the goods in which it has comparative advantage all countries benefit there is a bigger economic pie Specialization works but its boring a KARL MARX All means for the development of production Mutilate the laborer into a fragment of a man degrade him to the level of an appendage of a machine destroy every remnant of charm in his work and turn it into hated toil b Chose are career with high earning potential but not one that drives you crazy with boredom Coordination costs a If everyone specializes someone has to coordinate those specialization Trade helps society on a large scale and some industries suffer factories close downsizing hence protests While trade is efficient and it does increase the economic pie it is not equitable since some may have a smaller piece than before trade FREE TRADE AGREEMENTS OUTSOURCING Greatest security for workers is the ability to adapt quickly to changing circumstances


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