Econ Notes 3
Econ Notes 3 ECON 2010
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This 7 page Class Notes was uploaded by Leah Barton on Thursday February 4, 2016. The Class Notes belongs to ECON 2010 at Western Michigan University taught by Kim in Summer 2015. Since its upload, it has received 116 views. For similar materials see Principles of Microeconmics in Economcs at Western Michigan University.
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Date Created: 02/04/16
Econ 2010 Notes #2 Class Buyer/Seller Experiment explained: -For those of you who did not attend the class bonus experiment, here is a summary of what happened. -In the simulation, individuals were first assigned to be buyers or sellers. -Buyers are also given bid dollars, which was the maximum amount of money that they were permitted to spend on a book. -Sellers were also given a cap on the minimum that they may sell their book for. -If you were a buyer, your goal was to buy a book at the lowest possible ask price from the sellers. -If you were a seller, your goal was to sell your book to the highest possible bid from the buyers. -If each individual met their goal, they gained a profit, or gained in the money they got to keep. Production Possibilities Frontier (PPF) -An economic model; a graph that shows the combination of two goods the economy can possibly produce given the available resources and the available technology. *PPF does not include PRICE 1. Shifting the PPF – (economic growth) the PPF shifts when resources are adjusted. - A increase in resources shifts the entire frontier outwards. - A decrease in resources shifts the entire frontier inwards. 2. Opportunity Cost – what must be given up to obtain something else. - Moving along the PPF involve shifting resources from production of one good to the other. - 2 ways to calculate the PPF: 1.) Calculate slope to tell you the opportunity cost. 2.) Opportunity cost of good X =decrease in good Y/increase in good X - Ex: decrease in wheat/increase in computer - 1000 tons of wheat/100 computers = 10 tons of wheat (this is the opportunity cost, or the wheat your giving up in order to produce more computers.) Q: Ivan receives and allowance from his parents of $20 each week. He spends his entire allowance on two goods: ice cream (which costs $2 each) and tickets to the movies (which costs $10 each) What is the opportunity cost of one movie? What is the opportunity cost of one ice cream cone? A: The opportunity cost of one movie is 5 ice cream cones. ($10 movie/$2 ice creams= 5 ice cream cones) A: The opportunity cost of one ice cream cone 1/5 movies (2 movies/10 ice cream cones = 1/5 movies) *They are reciprocals! Q; Any point on a country’s PPF represents a combination of two goods that an economy… A: can produce using all available resources and technology. Q: Suppose a gardener produces both green beans and corn in her garden. If she must give up 14 bushels of corn to get 5 bushels of green beans, her opportunity cost of 1 bushel of green beans is … A: 2.8 bushels of corn (14 bushels of corn/5 bushels of green beans = 2.8 bushels of corn) 3. Shape of the PPF -Linear the opportunity cost of a good is constant. Assuming all the labor is identical. (This is false because everyone is different) -Bow-shaped the opportunity cost of a good is increasing as the economy produces more of the good. -the shape will be downward sloping Ch. 3 Trade Interdependence -Trade can make everyone better off -People specialize in trades. -Today we have expanded to trading across borders and benefit from the ability to exchange goods to get a cheaper price. - If there was no trade, you would have to make every single thing that you use! Ex: -Two countries: U.S. and Korea -Two goods: computers and wheat -Resource: labor -How much of both goods do each country produce and consume. Is it self-sufficient? Does it trade with other countries? -Korea has 30,000 labor hours. -One computer takes 125 hours -One ton of wheat takes 25 hours Find the endpoints of the PPF (30,000/125 = 240 computers, 30,000/25 = 1200 tons of wheat) -U.S. has 50,00 hours of labor. -One computer takes 100 hours -One ton of wheat takes 10 hours Find the endpoints of the PPF (50,000/100 = 500 computers, 50,000/10 = 5000 tons of wheat) Consumption without trade Ex: -U.S. produces 3400 tons of wheat. How many computers would the country be able to produce with remaining labor hours? How many computers can the U.S produce? A: (3400 * 10 =34,000 hours of wheat production. 50,000- 34,000=16,000 hours left to produce computers. 16,000/100 = 160 computers) -Korea produces 240 computers. How man tons of wheat would Korea be able to use with its remaining labor hours? A: 240 computers require all of Korea’s 30,000 labor hours. Korea would produce 0 wheat. Consumption with trade Ex: -Suppose the U.S. exports 700 tons of wheat to Korea and imports 110 computers from Korea. U.S. Consumption (160 computers + 110 computers = 270 computers to computers for the U.S. to consume. 3400 tons of wheat - 700 tons of wheat = 2700 tons of wheat for the U.S. to consumer) Korea Consumption (240 computers – 110 computers = 130 computers for Korea to consume. 0 tons of wheat + 700 tons of wheat = 700 tons of wheat for Korea to consume) *With trade you can consume good outside of the PPF line! Both countries will be better off Where do gains come from? Absolute advantage -The ability to produce a good using fewer inputs than another producer -The ability to produce more of a good than others using the same amount of resources Ex: -Country A can produce 100 gallons of ice cream with 8 hours of labor. -Country B can produce 50 gallons of ice cream with 8 hours of labor. Who has the absolute advantage? A: Country A Two measures of the cost of a good -Two countries from trade when each specializes in the good it produces at lowest cost -Absolute advantage measures the cost -Don’t forget about opportunity cost! Comparative advantage -The ability to produce a good at a lower opportunity cost than another producer Ex: -Which country has the comparative advantage in computers? In wheat? Determine opportunity cost! (on PPF, Rise/Run) (Decreasing good/increasing good) Of computers The U.S. = 5000 wheat/500 computers= 10 tons of wheat Korea = 1200 wheat/240 computers= 5 tons of wheat *Korea has the lower opportunity cost and has the comparative advantage Of wheat The U.S. = 500 computers/5000 wheat = 1/10 computers Korea = 240 computers/1200 wheat = 1/5 computers *U.S. has the lower opportunity cost and has the comparative advantage Gains from trade come from COMPARATIVE ADVANTAGE. NOT ABSOLUTE ADVANTAGE! Adam Smith -Who can produce goods using fewer inputs? -First person to realize the absolute advantage of trade and that people should specialize. -Specialization should be given to individuals with the absolute advantage, even if they are not the best at the specialization. David Ricardo -Modified Adam Smith’s view. -Who can produce at the lowest opportunity cost? -Believes people should specialize based on comparative advantage rather than absolute advantage. -Gains from trade arise from comparative advantage Terms of Trade (exchange rate) -Lower opportunity cost </ Terms of Trade </ Higher Opportunity Cost Chapter 4 The Market Forces Supply and Demand Markets -A group of buyers and sellers of a particular good or service. -Any place can be a market. Competitive Markets -Standardized goods (identical) -Full information (assume the buyer knows about the product before purchase) -No transaction costs -Participants are price takers (the price does not change after you make a purchase. Individual buyers and sellers do not influence price. You take the price as given.) Demand -If you demand something then you both want it and you can afford it. -The amount of a good that would be bought at each possible price, during some time period, given the environment. -Given the environment = everything else held constant = ceteris paribus Quantity demanded -The amount of a good that would be bought at a given price, during some time period and given the environment. -One price and one quantity. -Ex: If a Big Mac is $.99, I will buy 2. If it’s $.50, I will buy 3. If it’s $2.00, I will buy 1. Demand Schedule -A table that shows the relationship between the price of a good and the quantity demanded. Law of Demand -As price goes up, quantity demanded goes down -Other things being equal, the quantity demanded is negatively related to the price of a good. How do you find the slope of a demand curve? -Price on the y-axis, quantity on the x-axis. -Will always be a downward sloping curve because they are negatively related. Individual Demand vs. Market Demand -The quantity in the market is the sum of the quantities demanded by all buyers at each price.
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