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Econ 200 Week 2 Chapter 2 Notes

by: Drew Herring

Econ 200 Week 2 Chapter 2 Notes ECON200

Marketplace > University of Maryland > Microeconomics > ECON200 > Econ 200 Week 2 Chapter 2 Notes
Drew Herring

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These notes cover every single thing you'll need to know from chapter two. As compared to my last set of notes, these are much more interactive. You'll also find plenty of easy-to-follow examples t...
Principles of Micro-Economics
Hossein Abbasi Alikamar
Class Notes
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This 7 page Class Notes was uploaded by Drew Herring on Thursday September 8, 2016. The Class Notes belongs to ECON200 at University of Maryland taught by Hossein Abbasi Alikamar in Fall 2016. Since its upload, it has received 146 views. For similar materials see Principles of Micro-Economics in Microeconomics at University of Maryland.


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Date Created: 09/08/16
Week 2 Notes  Specialization and Exchange    2.0    ​ ntroduction ­­ Production Possibilities  A basic principle of economics is the drive to get the most production out of available  resources. This applies to business managers, sports coaches, and political leaders. This principle  seeks to answer the question: “How can I ma ​ ke the​ ery most out of what I’ve got?” This chapter  addresses that question. Consider the manufacturing of an iPhone. Apple is based in California,  but the different parts of the phone might be made and assembled in different countries all over  the world (although they don’t have to worry about making the headphone jack anymore...RIP).  This force, coined by famous economist Adam Smith as the ​invisible hand​, is due to the fact  that different countries can produce goods more efficiently than other countries can.    2.1    Drawing the Production Possibilities Frontier  A ​production possibility​ is any combination of goods that a group of workers can  produce in a period of time. Suppose a farm employs 100 workers. This farm specializes in  producing apples and strawberries. The most apples a worker can harvest in one day is 100, and  the most strawberries a worker can harvest is 300. How do you determine the best number of  workers to send out to each crop? We use something called a ​Production Possibilities Frontier  (PPF)​. The PP​F is a graph that shows a ​ ll possible variations of production based on the available  resources. The PPF gives us a way to visually represent the ​constraints ​on production. So, one  end of the PPF would list (100 workers X 100 apples) 10,000 apples per day, while the other end  would list (100 workers X 300 strawberries) 30,000 strawberries per day. Since you can’t neglect  one entire crop, it would be up to whoever is in charge to determine what number strikes the best  balance for harvesting both crops. To do this, he would use a PPF.  One thing to consider when deciding which good to produce (or in this case, which crop  to harvest), is the opportunity cost (O.C.) associated with that good. Remember, opportunity cost  is the ​value of the option that you ​give up in order to do something else. By spending your day  harvesting those 100 apples, you are giving up harvesting those 300 strawberries. Therefore, the  opportunity cost (O.C.) of your choice is ​300 strawberries​. Opportunity Cost is best represented  by the formula O.C.  =  Give up ÷ Gain. The O.C. of one apple is three strawberries. Likewise,  the O.C. of one strawberry is ⅓ of an apple.  Under this model, a PPF would look like this:      Just replace “guns” and “butter” with apples and strawberries and that’s what a simple  PPF would look like. Notice how when you trend towards one good over another, the production  of the other good decreases.  This model, sadly, is inaccurate. It assumes that all workers can harvest apples and  strawberries with equally ability. The reality of the situation is that some workers are better  suited for certain jobs. The idea behind putting your best suited worker towards their specialized  job creates a bowed­out effect in the PPF, and it looks something like:      This type of PPF is called a ​convex curve.​ Notice how as the curve nears the middle,  there are sections with higher rates of curvature. These sections are where the skill in a certain  job “drops off,” in other words, the efficiency begins to go down. As you move down the curve  in either direction, you move towards the workers who are better at harvesting that specific crop.  ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​


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