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Econ 251 Week 1 Day 2 Notes

by: Ronit Gavaskar

Econ 251 Week 1 Day 2 Notes ECON 25100

Marketplace > Purdue University > Economics > ECON 25100 > Econ 251 Week 1 Day 2 Notes
Ronit Gavaskar
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About this Document

These notes cover important topics such as Opportunity Costs, Marginal Benefits & Costs, Absolute Advantage and Comparative Advantage. All these concepts will be on our next exam.
Kelly Blanchard
Class Notes




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This 3 page Class Notes was uploaded by Ronit Gavaskar on Thursday August 25, 2016. The Class Notes belongs to ECON 25100 at Purdue University taught by Kelly Blanchard in Fall 2016. Since its upload, it has received 7 views. For similar materials see Microeconomics in Economics at Purdue University.

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Date Created: 08/25/16
Kelly Blanchard Lecture Notes DAY 2  “Free” Goods - Ex: Student activities fair o Cost = value of your time  COSTS OF COLLEGE: - Tuition, books, time, food, transportation, housing, entertainment - OPPORTUNITY COST OF COLLEGE o Tuition, books, Time - SUNK COST: irreversible expense o Food, housing, entertainment  Expect question on sunk cost on midterm  SUNK COSTS - Tesla X o $80,000 o opportunity cost of owning this car after one year = value of a used cost  $70,000  SUNK COST: $10,000 o Time spent waiting in a restaurant  WHAT IF THERE ARE MULTIPLE QUANTITIES? - Marginal Benefit = addition benefit from one more unit - Marginal Cost = additional cost from one more unit - If MB > MC => Increase in Quantity - If MB < MC => Decrease in Quantity - If MB = MC => no change in Quantity o Krispy Kreme Doughnuts  LAW OF DIMINISHING MARGINAL BENEFIT 1 Doughnut has a MB > MB of 24 Doughnut Marginal Benefit declines as quantity increases Marginal Cost increases as quantity increases Depiction of MB v. MC Graph - Marginal Benefit is the same thing as Demand - Marginal Cost is the same thing as Supply  Costs vary across Individuals - Scenario: Matt’s Tesla needs new tires o Matt can replace his own tires in 1 hour o Mechanic can replace Matt’s tires in 2 hours o Matt bills $250/hr.  Opportunity cost of Matt changing the tire: $250 and time o Mechanic charges $100/hr.  OC of Mechanic changing tire: $50 - ABSOLUTE ADVANTAGE o Produce same amount in less time or produce more in same amount o Since Matt can change tire faster than mechanic, he has Absolute Advantage - COMPARATIVE ADVANTAGE o Produce at lowest OC o Mechanic has Comparative Advantage over Matt  Example: 2 People own a cleaning business - Scott and Caroline clean bathrooms and make beds # bathrooms # beds Scott 4 12 Caroline 3 10  Scott has Absolute Advantage in both because he can clean more  COMPARATIVE ADVANTAGE calculation o Scott: 4 bathrooms = 12 beds o Caroline: 3 bathrooms = 10 beds  Scott’s OC for cleaning 1 bathroom = 12 / 4 = 3  Caroline’s OC for cleaning 1 bathroom = 10/ 3 = 3.33  Since Scott has OC in cleaning 1 bathroom, he has comparative advantage over Caroline because 3 < 3.33  Caroline has comparative advantage in making beds o No one person can have comparative advantage in every object RULES OF COMPARATIVE ADVANTAGE 1) If one person has comparative advantage in one task, the person must have comparative advantage in the other task 2) NO ONE CAN HAVE COMPARATIVE ADVANTAGE IN EVERYTHING COMPARATIVE ADVANTAGE AND ABSOLUTE ADVANTAGE WILL BE ON THE EXAM


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