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ECON 2105, Week 2 Notes

by: Randi

ECON 2105, Week 2 Notes ECON 2105

GPA 4.0

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Week 2 notes! Covered new concepts like PPF, Law of Demand, and capital goods! I also included examples of comparative and absolute advantage.
Class Notes
comparative advantage, absolute advantage, Economics, Macroeconomics, markets, competitivemarkets, investment, consumergood, lawofdemand, price
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This 4 page Class Notes was uploaded by Randi on Sunday August 28, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Summer 2016. Since its upload, it has received 17 views. For similar materials see Macroeconomics in Macro Economics at University of Georgia.


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Date Created: 08/28/16
Week  2  Notes     ECON 2105 PROF.  MCWHITE       HOW  DO  WE  STUDY  MARKETS?     CONCEPTS:     • Ceteris  paribus  –  “Other  things  the  same”   o This  term  is  used  to  describe  static  analysis  of  markets   o In  a  theoretical/perfect  market  where  everything  holds  constant,   what  will  we  observe?       • De  qustibus  non  es  disputandum  –  “To  each  his  own”   o This  term  means  there  is  no  accounting  for  tastes/preferences  of   individuals   o Every  person  has  their  own  likes  and  dislikes       • PRODUCTION  POSSIBILITIES  FRONTIER  (PPF)   o Economist  use  the  PPF  to  show  combinations  of  outputs  in  an   economy  given  the  available  factors  of  production  and  the  production   technology   o The  PPF  demonstrates  that  the  economy  is  constrained  by  the  ability   to  produce   § One  product  must  be  given  up  in  order  to  produce  a  different   product.       • At  point  A,  more  units  of   Good  A  are  being   produced  than  Good  B.     • Point  B  is  not  on  the  PPF   curve.  There  are  not   enough  resources  in  this   market  to  obtain  this   output.       • Point  C  displays  that  the   market  is  under  producing   and  not  maximizing  their   •   resources.         • At  point  D,  more  of  Good  B   is  being  produced.     Week  2  Notes     o A  PPF  shows:   § Efficiency:  Optimal  use  of  resources   § Tade-­‐Offs:  Constraints  to  what’s  possible,  forcing  a   substitution  of  one  thing  to  attain  another   § Opportunity  cost:  highest  forgone  alternative   § Economic  growth:  Increase  in  output     • Comparative  advantage     o Comparative  advantage  deals  with  the  differences  in  opportunity   costs  between  producers.  This  is  the  basis  for  specialized  production   and  trade!   o Who  is  the  low-­‐cost  producer  of  a  good?     § Who  has  the  lowest  opportunity  cost  of  producing  a  good?     • Absolute  advantage     o The  ability  to  produce  more  of  a  good  in  comparison  to  someone  else   *Just  because  a  producer  may  have  absolute  advantage,  does  not   mean  they  have  comparative  advantage!!!     For  example:       Hotdogs   Buns   Murr   20   10   Sal   90   30     Sal  has  absolute  advantage  in  the  production  of  both  hotdogs  and  buns  because  he  can   produce  the  most.  However,  Murr  has  the  comparative  advantage  in  the  production  of   buns  because  he  has  the  lowest  opportunity  cost.  For  every  1  bun  he  produces,  he  only   gives  up  producing  2  hamburgers,  while  Sal  gives  up  3:       Murr:     20  Hamburgers  =  10  Buns   1  Bun  =  2  Hamburgers         10     10     Sal:     90  Hamburgers  =  30  Buns     1  Bun  =  3  Hamburgers         30     30     On  the  other  hand,  Sal  has  comparative  advantage  in  the  production  of  hamburgers.   For  every  hamburger  he  produces,  he  only  gives  up  1/3  of  a  bun,  while  Murr  gives  up   1/2  a  bun:      Murr:     20  Hamburgers  =  10  Buns   1  Hamburger  =  1/2  Bun         20     20     Sal:     90  Hamburgers  =  30  Buns     1  Hamburger  =  1/3  Bun           90     90     Week  2  Notes     WHAT  DO  WE  KNOW  ABOUT  THE  MARKET/TRADE?     Ø Unemployment  is  about  people  trying  to  trade  their  skills.   Ø Taxes  affect  trade,  as  well  as  monetary  policy   Ø Competition  is  good  for  the  consumer   o It  allows  them  to  pay  lower  prices  than  what  they  would  in  a   monopoly   Ø Being  self-­‐sufficient  (independent)  is  time  consuming…  it  is  easier  to  trade.   Ø Patterns  of  production/trade  depend  on  opportunity  costs   Ø Trade  makes  us  interdependent   o People  are  better  off  when  they  specialize  in  what  they  are  best  at  and   then  trade  that  skill/product  with  others       VOCAB:     • Consumer  good:   o Any  good  that’s  produced  for  present  consumption   o Satisfies  wants  now     • Capital  goods:   o These  goods  help  in  the  production  of  other  valuable  goods/services   in  the  future   o For  example:  roads/trucks/computers/factories/education     • Investment:   o Investing  is  where  someone  uses  their  resources  to  create/buy  new   capital     • Competitive  market:   o There  are  so  many  buyers/sellers  that  each  has  a  negligible  impact  on   the  market   § This  means  that  because  there  is  such  a  large  quantity  of   people  in  the  market,  if  one  person  decides  not  to  buy  or  sell  a   product,  it’s  not  going  to  make  a  difference.  The  market  will   continue  on  unaffected   o There  are  little  to  non  transaction  costs   § Transaction  costs  are  the  time/money/effort  spent  before   buying  a  good   o All  information  is  known  by  both  groups     • Quantity  Demanded:   o The  amount  of  a  good  buyers  are  willing  and  able  to  purchase   Week  2  Notes     § You  must  be  willing  AND  able  to  be  apart  of  this  market   § Quantity  demanded  is  different  from  Demand!     • Law  of  Demand:   o Ceteris  paribus   o As  prices  decrease,  quantity  demanded  of  a  good  will  increase   o As  prices  increase,  quantity  demanded  of  a  good  will  decrease   § This  is  an  inverse  relationship!!   o ONLY  a  change  in  PRICE  causes  a  change  in  QUANTITY  DEMANDED     What  causes  a  change  in  DEMAND?   Everything  EXCPET  price  of  the  product!   • Consumer  income   • Prices  of  related  goods   • Consumer  tastes   • Expectations  of  future  events   • Number  of  buyers  in  the  market                  


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