Macroeconomics Week 2- ECON 2105
Macroeconomics Week 2- ECON 2105 ECON 2105
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This 6 page Class Notes was uploaded by lez38440 on Sunday August 28, 2016. The Class Notes belongs to ECON 2105 at University of Georgia taught by McWhite in Fall 2016. Since its upload, it has received 7 views.
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Date Created: 08/28/16
Macroeconomics Week 2 Chapter 2 Production Possibilities Frontier (curve): a model that illustrates the combinations of outputs that a society can produce if all of its resourc es are being used efficiently. To allow us to model trad e-‐offs more clearly, we must assume…. 1. Technology available for productive remains constant 2. Quantity of resources remain constant A So, lets say the graph represents E production of Chickfila chicken sandwiches vs. waffle fries in Athens, B Georgia. The vertical line represents waffle fries and the horizontal line is D chicken sandwiches. C Point E is unattainable because the technology and available quantity of resources does not permit this amount of both chicken sandwiches and waffle fries. Point C would be a production of exclusively chicken sandwiches. Point D is an inefficient use of resources. Best Decision Completely dependent on the people. People in Athens, Georgia may only want waffle fries but in Atlanta, Georgia, their preferred option may be a little of both. • To get the most out of resources, the option must be on the line. • The sloping curve relates to the idea of trade offs. You must sacrifice some of one option to obtain the other. • Law of increasing relative cost states that the opportunity cost of producing a good rises as a society produces more of it. • When more resources are available or new technology is created to speed up production, the entire PPF shifts upward and outward. Corresponds with economic growth. Gains from Trade and Interdependence It takes too much time for one person to everything alone. • Suppose you earn a certificate and become employed using these specialized skills throughout your career. These skills determine your salary, which you then use to purchase goods and services that you are not skilled at making yourself. • Patterns of production and trade are based upon differences in opportunity cost Comparative Advantage: being the low cost producer of a good. Differences in opportunity costs are the basis for specialization production and trade. Absolute Advantage: ability of one producer to make more than another producer with the same quantity of resources. Example: Bob and Ray are stranded on an island. They decide to catch fish and collect coconuts to survive. In one day, Bob can catch either 12 fish or collect 12 coconuts while Ray can either catch 24 fish or collect 12 coconuts. Coconuts Fish Bob 12 12 Ray 24 12 • Who is the low cost fisherman? Ray: 24 fish costs 12 coconuts or 1 fish costs .5 coconuts This means that Ray has a 2:1 ratio of fish to coconuts Bob: 12 fish cost 12 coconuts or 1 fish costs 1 coconut This means that Bob has a 1:1 ratio of fish to coconuts o Ray is the low cost producer of fish Normative Argument: Bob and Ray should trade because they will be happier. Positive Argument: If Bob and Ray trade they have potential to escape their current situation. Consumer good: produced for present consumption. Such as food, entertainment, and clothing. Capital Good: help produce other valuable goods and services in the future. Such as roads, factories, trucks, computers and education. Investment: the process of using resources to create or buy new capital. For example, when you decide to go to college instead of working, you are making an investment in your human capital. o Every investment in capital goods has an opportunity cost. Such as when a firm invests in a new factory to expand it is then unable to use that money to hire workers. o The higher the production of capital goods to plan for the future, the more economic growth. Example of Comparative Advantage and Absolute Advantage: Rick and Daryl are in the middle of a Zombie Apocalypse. In one day, Rick can either kill 40 zombies or collect 160 units of food. Daryl can either kill 50 zombies or collect 250 units of food. • Daryl has the absolute advantage in each scenario. Consumer Scenario ( ½ and ½) Zombies Food Rick 20 80 Daryl 25 125 Total 45 205 Comparative Zombie Advantage Rick: 40 zombies costs 160 units of food OR 1 zombie costs 4 units of food Daryl: 50 zombies costs 250 units of food OR 1 zombie costs 5 fish o Rick has the comparative advantage beca use he loses less food per zombie Comparative Food Advantage Rick: 160 food units cost 40 zombies OR 1 food unit costs ¼ zombie Daryl: 250 food units cost 50 zombies OR 1 food unit costs 1/5 zombie o Daryl has the comparative advantage because he loses less zombies per food unit Specialize Zombies Food Rick 40 0 Daryl 0 250 Total 40 250 • BUT we want 45 zombies killed……. Zombies Food Rick 40 0 Daryl 5 225 Total 45 225 o Use math from comparative advantage to calcul ate the number of food units Daryl loses when killing 5 zombies.
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