Production Possibilities Frontier/Comparative Advantage
Production Possibilities Frontier/Comparative Advantage Econ 2105
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This 4 page Class Notes was uploaded by Brad Schiebel on Sunday January 31, 2016. The Class Notes belongs to Econ 2105 at University of Georgia taught by Dr. Kris McWhite in Summer 2015. Since its upload, it has received 50 views. For similar materials see Prin of macroeconomics in Economcs at University of Georgia.
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Date Created: 01/31/16
ECON 2105 Notes Week of January 19, 2016 ▯ 1/20/2016 ▯ Making Decisions at the Margin Most Decisions are incremental changes Most decisions are “all or nothing” ▯ “If you eat a little less today, you might live a little longer. If you stop eating today you won’t live very long at all.” ▯ You stop when the additional cost is greater than the additional benefit of an action. ▯ Optimal Decision Point When the marginal benefit equals the marginal cost o MB = MC Why do most people not buy 15 burgers off the “Value Meal” @ Wendy’s ▯ Trade Increases Total Value ▯ Why do we trade? It is beneficial to both parties ▯ What is a market? Any place where buyers and sellers meet to (buy/sell) goods and services. ▯ Why do markets make us better off (increase value)? We end up with more “stuff” when we trade if… o Everyone focuses on their comparative advantage ▯ Comparative Advantage = being the “low cost producer” Having the lowest opportunity costs ▯ How many of you plan to quadruple major? No one, because that would be using way too much time and resources ▯ How many of you drink coffee? Where would you trust the most to get your coffee from? o McDonald’s vs. Starbucks Starbucks because it specializes in coffee making ▯ So are markets about competition vs. cooperation? Both We cooperate by doing what we are good at and trading The competition is deciding who to cooperate with ▯ ▯ ▯ The Study of Economics We try to approach problems and research using the scientific methods 1. Ask a question 2. Do background research 3. Construct a hypothesis 4. Test your hypothesis by performing an experiment 5. Analyze data and form a conclusion 6. Share results Scientific method is also used in chemistry, physics, psychology, etc. Hypothesis and testing We may have less lab control than other areas, but we make due We try to eliminate emotion from emotional topics and stick with testable theories ▯ ▯ What We Focus On Positive Economics (The “is”) Analysis of situations Not argumentative Reasonable people, armed with sufficient facts, do not disagree Normative Economics (The “should be”) Goal-oriented Specify an objective function and determine techniques to achieve goals Argumentative = essentially to disprove something and express an opposite view Positive is what we focus on, but the normative is the “fun stuff” o What could we prove using the principles of economics Again, where would we get our coffee, McDonald’s or Starbucks? “Capitalism is the astounding belief that the most wicked of men will do the most wickedest of things for the greatest good of everyone.” – John Maynard Keynes “From each according to his abilities, to each according to his needs.” – Karl Marx ▯ ▯ ▯ 1/22/2016 ▯ What is a Theory? We create a theory and try to explain them using models o A map is a model. It is: 1. Simple – easy to understand 2. General – applies to a principle 3. Useful – Accurately predicts observed behavior We then take our models and our experience and apply them to new situations to see if our model fits You used a model when you entered Econ class for the first time ▯ Foreign Phrases Commonly Used by Economists Ceterus Paribus = other things remain the same o Static analysis o Ex: The United States has low prices due to constant drilling domestically, not considering other factors that could increase prices De gastibus non es disputandum = to each his own o To put another way, “There is no accounting for tastes.” o However, this has been disputed and sometimes been proven impractical ▯ Big Picture – Trade: Why? Markets exist for trade Unemployment is about people trying to trade their skills GDP is “bean counting” for trade o Taxes affect trade and then gov’t uses revenue to engage in trade Promotes or discourages trade Monetary Policy Influences Trade International Markets is trade with different legal rules and money ▯ Production Possibilities Frontier (Curve) A graph that shows the combinations of output that the economy can possibly produce given: o Given available factors of production o Given available production of technologies o What determines the right answer is what people want Concepts illustrated by P.P. Frontier – a graph showing the outputs of the trade-off of goods. Illustrated on a curve o Efficiency = optimal use of resources o Trade-offs = constraints to what is possible, forcing a substitution of one thing to attach another o Opportunity cost = “highest forgone” alternative o Economic growth = increase in output ▯ Interdependence & Gains From Trade Have you ever been told being self-sufficient is a good thing? o It’s not! o Because doing everything for yourself takes too much time Interdependence is normal because people are better off when they specialize and trade What determines the pattern of production and trade? o Patterns of production and trade are based upon differences in opportunity costs Comparative advantage = differences in opportunity costs are the basis for specialized production and trade. > being the low-cost producer of a good Absolute advantage = ability to produce more in total of something by comparison ▯ ▯
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