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Macroeconomics Week 2- ECON 2105

by: lez38440

Macroeconomics Week 2- ECON 2105 ECON 2105

Marketplace > University of Georgia > ECON 2105 > Macroeconomics Week 2 ECON 2105

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These notes cover material that will be on the exam, taken from class and the book. McWhite is the Professor.
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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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