Exam 2 Lect. 1-4
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This 10 page Class Notes was uploaded by Karlee Castleberry on Tuesday February 2, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Spring 2016. Since its upload, it has received 44 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.
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Date Created: 02/02/16
Econ 2020- Exam 2 [definition formula relationships between variables] Lecture 1 – production possibilities frontier (ppf) o A curve that graphs all possible combos of 2 goods that an economy can produce o Things we will assume: 1. A single economy produces only 2 goods 2. The quantity of resources is fixed 3. Technology is fixed 4. Resources are identical (applies to ex #1 only) o Class PPF (constant opportunity cost) A. We could produce something at A, but it would be inefficient (unemployment) B. Efficient (full employment) C. we couldn’t produce this, given the resources we have. Unnattainable. NOTE: we can measure changes in unemployment as the production point moves A B: Decrease in unemployment B A: Increase in unemployment NOTE: once full employment is attained, the only way to increase the production of one good is to take resources away from the other (going up or down curve line) all efficient combos Fish 0 1 2 3 4 5 coconuts 4 36 27 18 9 0 5 Opp. Cost of a -- 9C 9C 9C 9C 9C fish - Opportunity cost of nth unit of X= quantity of Y at n-1 – Quantity of Y at n o Law of increasing opportunity costs As production of a good increases, the opportunity cost of producing an additional unit rises Opportunity cost = number of units of the other good given up Ex. One group is fishing majors, one is coconut gathering majors, one is general studies majors (know fishing and coconuts, but not great at either). Fish 0 1 2 3 4 5 Coconuts 45 42 36 27 15 0 Opp. Cost of a --- 3C 6C 9C 12C 15 fish C o We sacrifice n coconuts for n fish 2 o with an increasing opportunity cost…. o Point D is only attainable through economic growth or trade o C- only attainable through growth or trade Economic Growth o An outward shift of the PPF o Causes: 1. An increase in available resources 2. A technological improvement 3. A change in regulation o through growth, we can produce bundle D o through trade, we can consume bundle D without a PPF shift Lecture 2 o Chapter 24 – international trade markets o Trade Fish Coconuts Them 10 20 Us 12 48 3 Absolute advantage- the ability to produce more in a given time frame Which economy should produce each good? Comparative advantage- the ability to produce at a lower marginal opportunity cost Opp. cost of a Opp. Cost of a fish coconut 2 coconuts ½ fish 4 c ¼ f [from table above] Opportunity cost of good x = quantity of y / quantity of x We have comp. advantage for fish, they have comp. advantage for coconut o Production Assume that the economies completely specialize according to their comparative advantage. o production and consumption assume that the economies agree to trade 3 coconuts for each fish traded assume that the fish-producing economy is willing to trade 4 fish for coconuts 4 How much of each good will each economy produce and consume? Production: Them: 10 fish, 0 coconuts Us: 0 fish, 48 coconuts Trade: They export, we import 4 fish We export, they import 12 coconuts Consumption: Them: 6 fish and 12 coconuts Us: 4 fish and 36 coconuts 5 1. write down production and consumption prod. 60 G and 0 S cons. 30 G and 15 S this economy exports grits and imports shrimp exports: prod. – cons. = 60 – 30 = 30 grits imports: cons. – prod. = 15 – 0 = 15 shrimp terms of trade for imp = exp / imp 2 grits : 1 shrimp Lecture 3 o International trade arises primarily from Comparative Advantage o If we have a comparative advantage in production, we will export the good. If not, we will import it o Export markets Qs – Qd = US exports Lost consumer surplus = PwACPn Gained producer surplus = PwBCPn Net welfare gain = ABC o Import markets 6 US imports = Qd – Qs Lost producer surplus = PnACPw Gained consumer surplus PnABPw Net welare gain = ABC (yellow triangle) o Types of trade restrictions: Tarif – a tax levied on goods imported into a country Import quota – a specific limit or maximum quantity of a good permitted to be imported into a country during a given period o Impact of a tarif Pre tarif imports = Qd – Qs Post tarif imports = Qd1 – Qs1 Gained PS Gained tax revenue Deadweight loss 7 Qs Qs1 Qd1 Qd o Tarif vs quota Import quotas have a similar impact, except area B goes to foreign producers rather than the US govt With tarifs, foreign producers with the lowest costs will import the most With quotas, only foreign producers with permission may import, regardless of costs Lecture 4 – Ch. 6 Elasticity o Elasticity- a measure of the relative responsiveness of one variable to a change in another o Price elasticity of demand- the ratio of the % change in the quantity demanded to the % change in the price E d % ∆ Qd / % ∆ P Note: E ds always negative, but ignore the sign % ∆ Qd = ∆ Qd / original Qd % ∆ P = ∆ P / original P o Ex #1: When a price of a good falls from $10 to $8, Qd increases 200 to 250. Find E . d % ∆ Qd = (250-200) / 200 = 0.25 % ∆ P = (10-8) / 10 = 0.2 o E d .25 / .2 = 1.25 8 o Midpoint formula E d (∆ Qd / Avg Qd) / (∆ P / Avg P) OR [ (Q2 - Q1) / ((Q1 + E d = Q2) / 2) ] [ (P1 – P2) / ((P1 + Ex #1 midpoint formula Ed = (50 / 225) / (2 / 9) = .222 / .222 = 1 o Ex #2: Ed = 1.2 Qd = 100,000 P = $.50 Find ∆ Qd when ∆ P is $.05 Solution: 1.2 = (∆ Qd / 100,000) / (.05 / .500 .12 = ∆ Qd / 100,000 ∆ Qd = 12,000 units o Possible Price elasticity coefficients 1. Ed = ∞ ; perfectly elastic- a tiny change in P causes an infinite change in Qd a. Ex: agriculture markets b. j 2. Ed > 1 ; elastic- %∆Qd > %∆P ; flat graph 9 a. Ex: individual sellers of fast food or cereal b. . 3. Ed = 1 ; unit elasticity- %∆Qd = %∆P 4. Ed < 1 ; inelastic- %∆Qd < %∆P ; steep graph a. Ex. Gas, tobacco, cigarettes b. i. (P1 = top line, P = orange box) 5. Ed = 0 ; perfectly inelastic- a huge change in P causes no change in Qd a. Ex. Insulin, legal or illegal drugs b. 1 P 10
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