ECN 211 Week 3 (01/25-01/27) Notes
ECN 211 Week 3 (01/25-01/27) Notes ECN 211
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This 5 page Class Notes was uploaded by John Asigbekye on Wednesday January 27, 2016. The Class Notes belongs to ECN 211 at Arizona State University taught by Dr. Goegan in Spring 2016. Since its upload, it has received 17 views. For similar materials see Macroeconomics in Economcs at Arizona State University.
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Econ Notes – Week 3 01/25-27 COMPARATIVE ADVANTAGE Consumer Surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. Its value is the area of the triangle that encloses the blue region below. NB: MB = MC, thus, a consumer is willing to purchase a product whenever the marginal benefit of consuming equals its marginal cost. The opposite is producer surplus. It is the difference between how much it costs to produce the artifact and how much the consumer pays for it. When less people pay for a good than expected, that portion of triangle is the deadweight loss. People trade because they have different preferences for different things. COMPARATIVE ADVANTAGE VS ABSOLUTE ADVANTAGE When a producer can produce something using fewer resources than competitors, that is absolute advantage but if a producer can produce something at a lower opportunity cost than other competitors, that is comparative advantage. Their means of production are compared. Eg. The Lynda and Timothy Model By themselves, Lynda and Timothy can make 13.33 cakes each. Total there is 26.66 cakes. Through specialization and trade, they can make 20 cakes each! Lynda makes 40 batter and Tim 40 frosting. They make 40 cakes in total which is 20 each. Countries will trade in things they have an absolute advantage in: Adam smith. But David Ricardo said its comparative advantage instead. This is Smith’s main answer to the question of why we are rich. Riches come from specialization. Therefore, America is rich because a lot of people specialize. In the absence of trade, England requires 220 hours of work to both produce and consume one unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the same quantities. If each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, for England can spend 220 labor hours to produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125 units of wine. THE INDUSTRIAL REVOLUTION The economic growth worldwide rose unimaginably in the few past years. But why is that so? TIMELINE 10,000 BC World population is about 4 million people Avg income was an equivalent of $168 a year People scavenged for food NEOLITHIC REVOLUTION Around 5,000 BC with a population of about 6m people Avg income was an equivalent of $187 a year. Interestingly, some researchers believe this revolution brought about the inequality between the sexes. There is agreement though that this was a setback for humanity. Humans faces new and terrible diseases as a result of their lifestyle and diet. Most agree lifespans shrunk for a time. Many believe that this is where inequality between the gender was born. Also, because we had milk and stuff, people could have kids more quickly. THE BRONZE AGE Specialization was born. People begun to get rich – thus getting more than what they want. Avg income was an equivalent of $248 a year THE IRON AGE Wars emerge, it was a decline because people were fighting Avg income was an equivalent of $170-$203 a year THE MIDDLE AGES Governments were more powerful and orderly. Economy doubled every 600 years Population from 200m – 500m Avg income was an equivalent of $250 a year THE RENAISSANCE – YAYY INNOVATION! The main item is the printing press. It was the internet of its time. Avg income was an equivalent of $353 a year Population reaches 1b THE INDUSTRIAL REVOLUTION Economic growth now rapidly outpaces population growth which was 1.6b Annual income rises to $652 in 1850 and $3,810 by 1925. GROSS DOMESTIC PRODUCT (GDP) This is the all final goods and services produced in a country during a period of time, typically one year. The market value of a good is P * Q. GDP is all the market values of goods and services added together. This means that purchases made on the path of production are not included in counting the GDP. If you buy a textbook only to sell it, the buying price isn’t counted but the selling price is, only if the buyer of your textbook is going to use for personal use. Thus, if the consumer uses, the product or service, it is counted. If not it is not. The underground economy is also not counted. Y = GDP C = consumer consumption I = corporate and consumer investment G = government spending NX = net exports: exports – imports When GDP per capita increases from year to year, there is economic growth. GDP per capita is GDP divided by the population of the nation. Growth rate: the rate of change of GDP from the immediate previous year.