Week 4 Notes
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This 3 page Class Notes was uploaded by Cheyenne Hunt on Saturday February 20, 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 21 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.
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Date Created: 02/20/16
Week 4 Notes Feb 8 Production Possibilities Frontier Fish C Bowed PPF= increasing opportunity cost 5 B A= inefficient (unemployment) A B= efficient (full employment) 0 Coconuts C= only attainable through growth and trade (unsustainable) International Trade Markets (Ch. 24) Production Possibilities Fis Coconu h ts Economy 10 20 A Absolute advantage- the ability to produce more of a Economy 12 48 good in a given time frame B Comparative advantage- the ability to produce a good at the lowest marginal opportunity cost Opportunity cost of good X= quantity of good Y/ quantity of good X Which economy should produce which good? o If each economy has the absolute advantage for one of the goods, their specialization should be based on that. If one economy has the absolute advantage for both goods, specialization and terms of trade should be based on comparative advantage. Fis Coconu Op cost of (1) Op cost of (1) Absolute and Comparative h ts fish coconut Economy 10 20 2 coconuts ½ fish Advantages A Economy 12 48 4 coconuts ¼ fish B Specialization o Economy A should produce fish, and Economy A should produce coconuts Economy A Economy B Fish Fish 10 P 12 0 20 Coconuts 0 48 Coconuts Production and Consumption Assume that the economies agree to trade 3 coconuts for each fish traded and 4 fish for each coconut traded How much of each good will each economy produce and consume? Production Trade Consumption Economy A: 10 F and 0 C -4 F 6 F and 12 C Economy B: 0 F and 48 C 12 C 4 F and 36 C Feb 10 International trade arises primarily from comparative advantage If we have a comparative advantage in production, we will export the good. If not, we will import it. Export Market When the market opens to free trade, international consumers are added, which shifts the demand curve to the right Import Market When the market opens to free trade, international producers are added, which shifts the supply curve to the right Trade Restrictions Tariff- a tax levied on goods imported into a country Import quota- a specific unit or maximum quantity of a good permitted to be imported into a country during a given period Feb 12 Elasticity (Ch. 6) A measure of the relative responsiveness of one variable to a change in another Price elasticity of demand- the ratio of the percent change in the quantity demanded to the percent change in the price (Ed= %∆Qd/ %∆P) o Midpoint formula- Ed= (∆Qd/ average Qd)/ (∆P/ average P) Ex. 1 When the price of a good falls from $10 to $8, the Qd of the good increases from 200 units to 250 units. Find Ed. (50/200)/ (2/10) =1.25 OR (50/225)/ (2/9) =1 Ex. 2 Ed=1.2 1.2= (∆Qd/100,000)/(.05/.50) Qd=100,000 .12= ∆Qd/100,000 P= .50 ∆Qd= 12,000 Find ∆Qd when ∆P= 0.5 Possible Price Elasticity Coefficients 1. Ed= infinity; perfectly inelastic- a tiny change in P causes an infinite change in Qd 2. Ed>1; elastic- change in Qd is greater than change in P, curve is flat 3. Ed=1; unit elasticity-change in Qd equals change in P 4. Ed˂1; inelastic- change in Qd is less than change in P, curve is steep 5. Ed=); perfectly inelastic; a huge change in P causes no change in Qd
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