Econ 202 Week 2 Notes
Econ 202 Week 2 Notes Econ202
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This 5 page Class Notes was uploaded by Sydney Dingman on Thursday January 28, 2016. The Class Notes belongs to Econ202 at Colorado State University taught by Professor Christopher Blake in Winter 2016. Since its upload, it has received 29 views. For similar materials see Principles of Microeconomics in Economcs at Colorado State University.
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Date Created: 01/28/16
Week 2 Econ202 Notes 1/26/16 Module 3 Ice crea D m A B C Beer Three economic concepts in the PPF o Efficiency o Economic Growth o Opportunity Cost Efficiency: o Efficiency: Producing the most output possible, given our inputs (resources) o On PPF at points like A & B, our production level is attainable and efficient o Inside the PPF ( C ), the production level is attainable but inefficient o Outside the PPF (D), our production level is unattainable given current resources and technology but, could become attainable in the future Economic Growth o Economic Growth is the expansion of an economy’s ability to produce goods or services o Visually, one or more intercepts on the PPF shifting o Sources of economic growth: Increase in resources (land, labor, capital, entrepreneurship Improvement in technology o EX. Technological improvement in beer manufacturing o Redraw the PPF graph with beer at 60 instead of 40 Opportunity Cost o Opportunity Cost: What we are giving up to get something else o Visually, our opportunity cost is going to be represented by the slope of the PPF The steeper the slope, the higher the opportunity cost o Because we have drawn PPF as a straight line, we assume the opportunity cost is constant We have assumed, we are always giving up one good or service in order to get another This is not realistic, because it assumes all resources are equally able to produce each good or service o Steps for calculating opportunity cost Set end points equal 30 ice cream = 40 beer Solve each side for 1 Opportunity cost of ice cream: Divide both sides by 30; o 1 ice cream = 4/3 beer o In order to produce one ice cram, we must give up 4/3 of a beer Opportunity cost of beer: divide both sides by 40 o ¾ ice cream = 1 beer o In order to produce one beer, we must give up ¾ of an ice cream More realistic example: Coconu ts Fish Increase opportunity costs 2 o For example, boxes wash up on shore with a net, a spear, baseball bat o From A to B, place net to fish and spend the rest of the day collecting coconuts o Opportunity costs increase because certain resources are better suited to produce certain goods and services than other 1/26/16, Module 4 Comparative Advantage Goal: show that two parties who can benefit from specialization and trade o Specialization: idea that we want to focus our efforts and/or resources to produce one type of good or service Conceived by Adam Smith originally, was the founder of modern economics Wealth of Nations (1776): tells a story of a pin factory, by specializing, we could see how production would increase quite a bit. (e.g. sharpening the pin, putting hole for thread, putting ball on it.) Example: Russia and Zimbabwe produce some combination of coffee and apple pie o Separate graphs for Zimbabwe and Russia with coffee on the x- axis and apple pie on the y. If Russia devotes all resources to apple pie, they can make 100 pies and 50 coffees If Zimbabwe devotes all resources to apple pie, they can make 40 pies and 40 coffees o Comparative advantage- you have a comparative advantage in something if your opportunity cost of producing it is lower than someone else’s We should specialize in production of the G/S for which we have a comparative advantage Forms the basis for gains from trade o Calculate opportunity cost for each country Russia: 100 pies=50 coffees… 1 pie=1/2 coffee, 1 coffee=2 pies 3 Gives up less coffee for each apple pie Zimbabwe: 40 pies=40 coffees… 1 pie=1 coffee, 1 coffee=1 pie Gives up less pie for each coffee o Russia has a comparative advantage in apple pie production and Zimbabwe does in coffee Show a trade where both economies consume a bundle outside their PPF If Russia devotes all resources to apple pie, they can make 100 pies and 50 coffees Therefore, Russia should only produce apple pie. The point at 100 represents the production before trade If Zimbabwe devotes all resources to apple pie, they can make 40 pies and 40 coffees Therefore, Zimbabwe should only produce coffee. The point at 40 represents the production before trade Terms of Trade: determines ratio of trade between both economies, agreement between two economies where they decide how many apple pies each coffee is worth and they trade that amount o Zimbabwe has goal of getting as many apple pies per coffee as possible, but cannot ask for more than 2 apple pies per coffee. o Zimbabwe will need at least one apple pie per coffee to make the trade beneficial o Terms of trade are mutually beneficial if it falls between the opportunity costs of the two economies Each coffee traded for between 1 and 2 apple pies EX. Terms are set at 1 coffee=1.5 apple pies o Trade 30 coffees for 45 apple pies Russia has 55 apple pies and 30 coffees after trade, this point is the consumption after trade Zimbabwe has 10 coffees and 45 apple pies after trade, this point is their consumption after trade 4 o Through this trade, both economies consume outside of their PPF, which means they are better off than they would be on their own. Absolute advantage: the idea that some economy can produce more when they specialize than other economies o Russia has absolute advantage in both G/S o Even if this is true, gains from trade can still exist. o This advantage has no bearing on gains from trade 5
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