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by: Isaac Lemus

ECON 203 WEEK 2 NOTES Econ 203

Isaac Lemus

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About this Document

These notes cover anything that was discussed during our second week of class
Principles of Microeconomics
Giri Rahul
Class Notes
Econ, 203, tradeoffs, comparative, absolute
25 ?




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This 4 page Class Notes was uploaded by Isaac Lemus on Monday September 5, 2016. The Class Notes belongs to Econ 203 at University of Southern California taught by Giri Rahul in Fall 2016. Since its upload, it has received 16 views. For similar materials see Principles of Microeconomics in ECON at University of Southern California.


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Date Created: 09/05/16
Econ 203  Lecture notes 8/30  ● PFF graph­ Production possibility frontier (what is the maximum amount of products I  can make in correlation to each other)  ● Example  ●   ○ Let’s say that when the economy moves from one point to another the computers  go from 0 to 100 and the wheat goes from 50000 to 40000.   ■ therefore the opportunity cost of one computer is 10 tons of wheat. (divide  and reduce AKA find the slope at a given point).  ○ Slope is equal to the opportunity cost, therefore when the slope is constant, no  matter where you are on the line the opportunity cost is exactly the same  ○ To increase the production of one group of products I need to deplete the  production of another good, or at least for this case  ○ All points on the PFF means efficiency; fully utilized    ○ If the point is under the graph, there is a deficiency in the process.  Unemployment in the economy. Wasting resources.   ○ If the point is over the graph, it’s technically not possible, unless there is an  innovation (talked about below)  ○ In this graph labor is always held as a constant.   ● Which country’s opportunity cost is lower to make cloth    ○ England, because the slope of the line is far less negative so there is less of a  shift if someone decides to make more cloth.    ● Now,  if the whole line moves, that means there is an improvement in the process and  economic growth (Technology, innovation, expansion of hours, care for the employees,  better education).      ● But okay these PFF graphs are for perfect cases, ideal scenarios. Actual basic PFF  graphs look more like this  ●   ● The slope of the graph increases as you create more and more mountain bikes therefore  the opportunity cost becomes greater and it takes more and more beer to fulfil the need  (look at the tangent lines I wrote on the curve)..   ○ Why does the slope increase?  ■ As people shift from making beer to mountain bikes, the first people to go  are more likely to be very good or specialized at their new job. The last  people to go aren’t as great as the people before, so more needs to be  given up.  ■ human condition to production. The more bikes that are made the longer  people have to work and the less effective people will be. People aren’t  machines.  ● The Economist as Policy Advisors   ○ Positive statement­ Explains the world as it is  ○ Normative statement ­ Explains the world as it should be    Lecture Notes 9/1: Trade, the gains of interdependence  ● Central question: Why do people or countries trade? How does trade benefit everyone?  ○ Well no one person or country is completely self sufficient. It would just seem  unreasonable and inefficient if we had to produce everything we consumed.  Trade is our solution because now people and countries can specialize, and  produce certain items which they can do more effectively in comparison to  others. Trade allows us to play around with cost, quality, and preference.    ○ Exports: going out of the country  ○ Imports: Going into the country  ● Let’s take a look at an example: The US and Japan   ○ In this example we’ll compare the production of two goods, computers and  wheat, with one resource, hours of labor, and see how much the countries can  produce if they are completely self sufficient vs if they trade with one another    ○ US: 100000 hours of labor, 100 hours of labor to produce one computer, 10  hours of labor to produce one ton of wheat. Here’s how the PFF graph would look  like:     ○ JAPAN: 60000 hours of labor, 125 hours of labor to produce one computer, 25  hours of labor to produce one ton of wheat    ○ So without any trade the US gets 500 computers and 5000 tons of wheat while  Japan gets 240 computers and 1200 tons of wheat.  ○ Okay now let’s change things up and see if they will benefit from trade.  ■ Suppose the US produces 7000 tons of wheat and 300 computers while  Japan produces 480 computers and 0 tons of wheat.  ■ Now let’s say the US exports 1400 tons of wheat to Japan and imports  220 computers      Before Trade  Before Trade   After Trade  After Trade    WHEAT  COMPUTER  WHEAT  COMPUTER  US  5000  500  7000­1400= 300+220=  6600  520  JAPAN  1200  240  0+1400=  480­220=  1400  260  ○ By trading, both Japan and the US got more products than with what they started  with! But where exactly did these extra goods come from?  ■ Absolute advantage: If A person or countries can produce a goods with  fewer inputs in comparison to another country.  ● The US has a comparative advantage in both wheat and  computers because it only takes 100 hours to produce one  computer (versus 125 in japan) and 10 hours to produce wheat  (versus 25 in Japan)  ■ Comparative advantage: instead of looking at the inputs required to  produce a certain good (hours of labor) comparative advantage looks at  the opportunity cost of producing a good, in this case, how much wheat it  cost to make a computer and vice versa.  ● So for the US: one computer costs 10 tons of wheat    ● And for Japan: one computer costs 4 tons of wheat  ● So Japan has a comparative advantage!   ■ Comparative advantage is where gains from trade occur! If countries  specialize in whatever area they have a comparative advantage in, the  total production of all countries increases.  


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