Econ 102 week 2 notes
Econ 102 week 2 notes ECON 102
Popular in Introductory Microeconomic Analysis and Policy
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This 4 page Class Notes was uploaded by Eswhydee on Friday January 22, 2016. The Class Notes belongs to ECON 102 at Pennsylvania State University taught by Jared McEntaffer in Winter 2016. Since its upload, it has received 35 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.
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Date Created: 01/22/16
Econ 102 Notes for 1/19/16 Comparative Advantages and Trade The wealthiest economics are those where people and workers are specialists, people that specialize in one thing. We are all getting trained to do one thing really well. Opportunity Cost Economic cost = Monetary cost + Opportunity cost Opportunity cost is what you give up. Ex. The opportunity cost of going to college is not being able to work and make money. Ex. Going to the game Direct cost Tickets $50 Drink $10 Opportunity cost Visiting your grandfather. Now your grandpa is mad and he took you off the will which was 100,000 Production Possibilities Frontier (PPF) You have to give somethings up in order to make other things. The frontier is efficient The frontier represents the maximum possible output for a given level of technology Points outside the frontier are unachievable Points inside the frontier are inefficient (not doing the best you can) Slope of the PPF = OC for one unit of the “X” axis good 1 / slope of PPF = OC for one unit of the “Y” axis good Non-linear PPF Opportunity costs are not constant Increasing marginal opportunity costs More realistic New planting method allows farmers to increase yields without increasing fertilizer use represents economic growth. Economic growth means more output with the same amount of inputs 1/21/16 Absolute Advantage: one country/ person/ company is strictly better at producing a good than the other Comparative Advantage: one country/ person/ company can produce a good at lower opportunity cost than the other. Specialization and Gains from Trade Step 1: Specialize Canada produces 20 lumber. Mexico produces 20 avocados Step 2: trade 1 lumber for 1 avocado Canada trades 10 lumber for 10 avocados Mexico trades 10 avocados for 10 lumber Both countries now have 10 lumber and 10 avocados Specialize and trade What if the exchange was 1 lumber for 2 avocados? A piece of wood is more valuable than an avocado Canada trades 5 lumber for 10 avocados Mexico trades 10 avocados for 5 lumber. Canada is much better off and Mexico is no worse off than if it didn’t trade. Absolute vs. Comparative Advantages Consider the case of automobile manufacturing in the United States (US) and Germany (DE) For US the opportunity cost of 1 truck is 1 Car For DE the opportunity cost of 1 Truck is 2 cars The US has a comparative advantage in the production of trucks The US has an absolute advantage in producing trucks. For US the opportunity cost of 1 car is 1 truck For the DE the opportunity cost of 1 car is 1/2 a truck Germany has a comparative advantage in the production of cars Comparative advantage is based on differences in opportunity costs Comparative advantages drives trade We trade because it makes us better off Upsides to trade: Total output and consumption is higher than without trade More efficient so fewer wasted resources Increased variety and diversity Downsides: Lost jobs in developed countries Potential resource exploitation in developing countries
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