Chapter 2 Notes January 25
Chapter 2 Notes January 25 ECON113103
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This 6 page Class Notes was uploaded by Alexandra Intriago on Monday January 25, 2016. The Class Notes belongs to ECON113103 at Boston College taught by Professor Francesca Toscano in Spring 2016. Since its upload, it has received 116 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Boston College.
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Date Created: 01/25/16
ChapterU nit 2 0 Production Possibility Frontier and Opportunity Cost 0 Production Possibility Frontier is used to calculate how much a company or country should produce 0 Simplified PPF Graph 0 A R lt gt v A 0 Since PPF is a straight line the slope and opportunity cost is constant 0 In reality however the graph does not look like this 0 From A l to A 2 you gain 20 units of small cars and lose 5 units of big cars 0 The opportunity cost of 20 small cars is 5 big cars you must give up 5 big cars to get 20 small cars 0 From A2 to A3 you gain 20 small cars and lose 25 big cars 0 Opportunity cost of 20 extra small cars is 25 big cars 0 As you move down the PPF the opportunity cost increases 0 Conclusion slope is not constant with this shape and the opportunity cost increases as you move along the PPF Competitive Advantage a country has a competitive advantage if the opportunity cost in the production of a good is lower 0 Should the US produce small or big cars O Slope of PPF of the US is the change of big cars divided by the change in small cars Changebig ears 30 Change small cars 40 O Opportunity cost of producing small cars for US is 3 Z Slope without the negative Sign 4 O Opportunity cost of the big cars for the US is reciprocal of the small 3 car 0 Should Germany produce small or big cars Changebigears 10 1 Change small cars 3O 3 O Opportunity cost of small cars for Germany is g 0 Opportunity cost of producing big cars for Germany is 3 0 Which country should produce small cars l 0 g Germany opportunity cost 0 US opportunity cost 0 The opportunity cost is lower for Germany loses less thus it has a competitive advantage in the production of small cars 0 Germany will thus produce and specialize in small cars 0 30 is the maXimum amount they can produce based on the graph from before 0 Which country should produce big cars 0 3 Germany opportunity cost 0 g US opportunity cost 0 US has the competitive advantage in the production of big cars so it will produce and specialize in big cars 0 30 is the maXimum amount they can produce see graph 0 With specialization 0 US I 30 big cars I 0 small cars 0 Germany 30 small cars I 0 big cars 0 This is only the production side so we must account for consumption as well 0 What is the effect of trade 143 V y 0 ihout trade h counry conses What it produces 0 We saw that the US specializes only in big cars because they have a competitive advantage and Germany specializes only in small cars for the same reason Big 18 18 US Small 16 16 0 3O 20 20 Germany produced Germany consumed Small 4 HEM Li W 0 Countries can gain 2 units from subtracting consumption Without trade from consumption with trade 0 Countries can benefit from trade 0 20 182 O 10 64 Competitive Advantage vs Absolute Advantage 0 Competitive Advantage refers to the opportunity cost 0 Absolute Advantage occurs when the output per worker is higher 0 The US has an absolute advantage in the production of big cars because the maXimum amount they can produce is higher 0 US also has the absolute advantage in the production of small cars 40 is bigger than 30 I gt see graph for clarification 0 A country may have an absolute advantage but no competitive advantage 0 Example 0 60 acres of land I 10 bushels of corn per each acre I 10 bushels of Wheat per each acre 0 A discovery comes along and you can produce 15 bushels of Wheat per each acre 0 PPF before discovery 0 Maximum amount of wheat is 600 bushels 0 Maximum amount of corn is 600 bushels 0 PPF after discovery highlighted part 0 Maximum amount of wheat is 900 bushels 0 Maximum amount of corn is 600 bushels 0 The PPF will change 0 If the number of resources change 0 If there are improvements in technology
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