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ECON 2010 Week 2

by: jared.stein Notetaker

ECON 2010 Week 2 ECON 2010

jared.stein Notetaker


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These are my notes for Week 2 (lectures 4, 5 & 6) for ECON 2010 with Prof. Charles de Bartolome
Principles of Microeconomics
Dr. Charles A M de Bartolome
Class Notes
Economics, finance
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This 16 page Class Notes was uploaded by jared.stein Notetaker on Sunday September 11, 2016. The Class Notes belongs to ECON 2010 at University of Colorado at Boulder taught by Dr. Charles A M de Bartolome in Fall 2016. Since its upload, it has received 7 views. For similar materials see Principles of Microeconomics in Microeconomics at University of Colorado at Boulder.


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Date Created: 09/11/16
08/29/16 Lecture 4: I. Introduction: A. Trade has been going on a long time: II. Thinking about Trade: A. Trade 1. 1700’s Mercantilism: Each country’s happiness measured by the bullion it accumulated: each country should try to sell goods to other countries (gain bullion) but not buy from other countries (give-up bullion). a. So thinking became: “Don’t buy from others, make it ourselves.” b. Policy became: “Go it alone” • Britain and France formed “Spheres of Influence” and prohibited buying from other spheres of influence. • Ex) North Korea and Former Soviet Bloc 2. 1776 Adam Smith: “An inquiry into the Nature and Causes of the Wealth of Nations.” a. An attack on Mercantilism • No farmer would “Go it alone.” • If said farmer had good cropland, he wouldn’t set some aside for grazing cattle. • Instead: He would use all his land for crops and get meat and milk by trading with farmers who had good cattle/ranch land. b. Said that each country’s happiness determined by the goods it consumes, not by the bullion it acquires. c. Power of free markets (allows countries to consume above PPF 3. 1815 Corn Laws introduced in Britain: Restricted corn imports. 4. 1817 David Recardo: “Principles of Political Economy and Taxation” a. Argued that trade is “good” and that banning trade is “bad.” b. Developed Comparative Advantage • The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. • Countries who are good at making one thing ought to produce that because they are better at making it than other countries, then trade with other countries for the things that the other countries are good at making 5. 1846: Corn Laws repealed: Britain abandoned Mercantilism, embraced Free Trade. 6. Today: Many trade blocs formed to encourage trade a. US belongs to NAFTA, CAFTA, APEC, and WTO. Still signing free trade agreements b. c. Concern about jobs • Trade causes job loss (increased efficiency) but also creates jobs (increase production). • Jobs lost at Key Tronic and gained at suppliers B. Why Trade is Good 1. It is the mechanism that allows countries to consume above their Production Possibility Frontier (PPF). a. This is an example that demonstrates the mechanisms by which countries achieve consumption above PPF Total Hours: US 100 (million) Mexico 72 (million) 2. Each country acting alone cannot consume above its Production Possibility Frontier. a. b. US: • If all labor is used to make electronics: 100/10 = 10 (million) electronics. • If all labor used to make toys: 100/5 = 20 (million) toys. • Opportunity cost of 1 unit electronics = 2 unit toys (slope frontier) By calculation: 1 extra unit of electronic = 10 hours of labor shifted to produce it. 1 hr labor = 10 x ⅕ unit toys = 2 unit toys c. Mexico: • If all labor is used to make electronics: 72/24 = 3 (million) electronics • If all labor is used to make toys: 72/8 = 9 (million) toys • Opportunity cost of 1 unit electronic = 3 unit toys By calculation: 1 extra unit electronic made = 24 hours of labor shifted to produce it 24 hrs labor = 24 x ⅛ unit toys = 3 unit toys d. Different opportunity cost of production: • Opportunity cost of producing 1 unit electronics (give up...): US: 2 unit toys Mexico: 3 unit toys • Opportunity cost of producing 1 unit toys (give up…): US: ½ unit electronics Mexico: ⅓ unit electronics • If US has lower opportunity cost in electronics, Mexico must have lower opportunity cost in toys. • Each country must have lower opportunity cost in one product. C. Together, Countries can Reorganize Production to get more Output. 1. a. Suppose no trade: US is producing at US, Mexico is producing at Mexico. Both producing both products. 1. Shift production of each good to country with lower cost a. Relevant cost is opportunity cost b. Presumably related to monetary cost but fundamental cost is opportunity cost. c. By doing this, total resources are used more productively. • US makes: 1 more electronics; 2 less toys Mexico makes: 1 less electronics; 3 more toys + 0 electronics; +1 toys - US makes +1 electronics, Mexico makes -1 electronics; electronics unchanged - US makes -2 toys; Mexico makes +3 toys; +1 toys. Extra toys produced in Mexico exceeds toys given up in US. More toys produced if CD>AB d. To gain both electronics and toys US makes: 1 more electronics; 2 less toys Mexico makes: 0.8 less electronics; 2.4 more toys + .2 electronics; +.4 toys c. Specialization Work down PPF at each stage: • US makes: 1 more electronics; 2 less toys Mexico makes: 1 less electronics; 3 more toys + 0 electronics; +1 toys • At each stage toys increase. • Continue until: US is doing both and Mexico does only toys or Mexico is doing both and US does only electronics • Each country is making one more of one product than it consumes: Specialization. D. Extra output can be shared so that each country consumes more electronics, more toys,gets above its PPF. 1. a. US • Makes 1 more electronic; 2 less toys • Gives 1 electronics to mexico • To consume above PPF, must gain more than AB toys, more than 2 toys from Mexico b. Mexico • Makes 1 less electronics; 3 more toys • Gets 1 electronic from US • To consume above PPF, must give less than CD toys, less than 3 toys to US. c. Both gain if Mexico gives US some number toys between 2 and 3 units (between the opportunity costs) E. This is exactly what the Market Mechanism Does! 1. a. Both countries gain and therefore will want to specialize and trade if (voluntarily agreed) price lies between opportunity cost. • More than 2 (US gains) • Less than 3 (Mexico Gains • So 2.5 toys per electronic b. US • Makes 1 more electronics, 2 less toys • Gains if sells 1 electronic to Mexico for more than 2 toys (greater than AB) • Price greater than US opportunity cost • Gets above PPF C. Mexico • Makes 1 less electronics, 3 more toys • Gains if buys 1 electronics from US for less than 3 toys (less than CD) • Price less than Mexico Opportunity cost • Gets above PPF “What each cannot do alone, markets enable them to do together.” -Adam Smith III. Recap A. Gains from Trade 1. Abandoning the “go it alone” policy means both countries can get more of each good if: • Production of each good is concentrated in the country with the lowest opportunity cost (specialization) B.Trade 1. If US has lower opportunity cost in electronics: • US makes more electronics than it consumes, sells surplus to Mexico- exports electrics • US makes less toys than it consumes, buys difference from Mexico- imports toys 2. So Mexico has lower opportunity cost in toys • Mexico makes more toys than it consumes, sells difference to US - exports toys • Mexico makes less electronics than it consumes, buys difference from US- imports electronics C. Jobs 1. US loses jobs in toys but gains jobs in electronics 2. Mexico loses jobs in electronics, gains jobs in toys D. Absolute advantage and comparative advantage 1. To make an electronic, US uses less labor • Has better technology or absolute advantage in technology 2. To make a toy, US uses less labor • Has better technology or absolute advantage in toys 3. US has better technology for both products: • Absolute advantage in both producs • Makes more per hour of labor and thus, is wealthier 4. What really matters is deciding who should make what • Relative opportunity cost, also called “Comparative advantage” D. Why “Go it alone” gets it wrong 1. It’s about what happens to the worker who loses his job. • Ex: The way workers in Granite City are thinking: If don’t make steel, make nothing, better to make steel. 2. Modern thinking: If worker is laid off and doesn’t make steel, shift to new job in exporting industry. • Part used to pay for imports, part kept in US 3. RL Example: World War 2 Japan insisted that all territories in S/E Asia become self sufficient. • Destroyed region’s food trade • 1944-45: 1-2 million Vietnamese starved to death • From “The Taste of War: World War Two and the Battle for Food” by Lizzie Collingham 2011 08/31/16 Lecture 5: I. Trade A. Trade & Jobs 1. Good News: More output is produced, creates new jobs and even new sectors. 2. Bad News: People must change jobs, NOT lose jobs and never get re-employed • Have to move to where the new jobs are in the new or expanding sectors • i.e. Last lecture in US move from shrinking sector (toys) to expanding sector (electronics) B. Comparing the Gains and Costs of Trade 1. The gain from trade is the increase in good consumed. • The gains are long-term or recurring. • Ex: 2017 +$150 2018 +$150 2019 +$150 …..and so on 2. The cost of trade is that workers in the shrinking sector lose their jobs. Aren’t going to be permanently unemployed though, there is an expanding sector that can hire them. Just need to move and be retrained. • The costs are short-term or once-off • Ex: 2017 -$200 2018 -$100 3. Overall: In the early years costs may exceed gains but total gains exceed total costs. The issue is that the cost burdens workers 4. Policy: Reduce cost on laid-off workers by using some of the growth to retrain them with the skills needed by the expanding sectors • NAFTA legislation included aid for workers who lost jobs: 117,000 signed up. • TPP is likely to have similar policies for displaced workers II. Specialization A. Outsourcing 1. Don’t have to do every task ourselves (don’t have to be self sufficient), we can outsource. B. Each individual can specialize: 1. In what they do relatively best 2. In what they have lower opportunity cost 3. In what they have comparative advantage C. Example 1. 2 workers in firms A and B. Firm needs managerial and administrative output A: needs less labor than be to produce managerial or admin. CU Grad has absolute advantage in mgmt and in admin. 2. Each worker works 40 hours per week. Office initially organized so that each worker producing both outputs. Then boss wants more output from the office 3. Production Possibility Frontier for each person: a. CU Grad: • If only does management: 40/4 = 10 units mgmt • If only does admin: 40/2 = 20 units admin • To produce extra 1 mgmt, shifts 4 hours labor • Opportunity cost of 1 unit mgmt = 2 unit admin, so slope = -½ 1 hour = ½ mgmt 4 hours = 4 * ½ = 2 unti admin b. UNC Grad: • If only does management: 40/16 = 2.5 unit mgmt • If only does admin: 40/4 = 10 unit admin • To produce 1 extra unit mgmt, shifts 16 hours labor • Opportunity cost of 1 unit mgmt = 4 admin 1 hour = ¼ unit admin 16 hours = 16 * ¼ = 4 unit admin c. A has comparative advantage in mgmt. B has comparative advantage in admin. • CU Grad: Opportunity cost of 1 unit mgmt = 2 admin Opportunity cost of 1 unit admin = ½ unit mgmt • UNC Grad: Opportunity cost of 1 unit mgmt = 4 admin Opportunity cost of 1 unit admin = ¼ mgmt 4. By getting workers to specialize, boss gets more output. a. Suppose CU Grad is producing at A, and UNC Grad at B. Both are producing both outputs • Shift production of mgmt to worker with lowest of mgmt (CU) • Relevant cost is opportunity cost • Presumably related to money cost, but fundamental cost is opportunity cost • Shift production of admin to worker with lower cost of admin (UNC). By doing this, total resources are used more effectively • By Calculation: CU +1 mgmt -2 admin UNC -1 mgmt , +4 admin +0 mgmt +2 admin b. More admin produced if GH>EF. • Extra admin produced by UNC exceeds admin given up by UC. • Opportunity cost of mgmt by UNC > opportunity cost of mgmt by UC 5. To get more mgmt and more admin a. To get more mgmt and admin • UC Grad increases mgmt by 1 unit, B reduces mgmt by slightly less than 1 unit; more mgmt overall. • By Calculation CU +1 mgmt -2 admin UNC -0.8 mgmt +3.2 admin +0.2 mgmt +1.2 admin 6. Specialization a. Work down frontier, CU +1 mgmt -2 admin UNC -1 mgmt +4 admin +0 mgmt +2 admin b. At each stage admin increases: • Continue until CU Grad is doing only mgmt and UNC is doing both Or • CU Grad is doing both and UNC is doing only admin c. One grad is only doing one task - specialization. By specializing more work is done with same people 7. Outsourcing a. Consider CU Grad and UNC Grad • Now work at different firms CU at Firm A and UNC at Firm B • One firm specializes in consulting (mgmt) • Other firm specializes in service (admin) b. Each firm has its own PPF, possibility of specializing and outsourcing • Firm A sells admin services to clients, which it buys from Firm B • Firm B sells mgmt consulting to clients, which it buys from Firm A c. By Specializing and trading, each firm can sell more or get more than its PPF. • Firm A: • Produces 1 more mgmt, 2 less admin • Firm A doesn’t need all this mgmt so gives 1 mgmt to Firm B • To get above PPF, must gain more than 2 admin from Firm B • Firm B: • Produces 1 less mgmt, 4 more admin • Gets one mgmt from Firm A • To stay above PPF Firm B has to give less than 4 admin to Firm A • Admin. Trade • If Firm B gives Firm A between 2-4 units of admin. (let’s say 3 admin.), then both Firms are selling services above their individual PPF 8. This is what the Market Mechanism does! a. Both want to specialize and trade at a voluntarily agreed price between opportunity costs: • More than 2 (so Firm A gains) But also, • Less than 4 (so Firm B gains) b. So, Firm A can set price of 1 unit mgmt unit for 3 units admin. • Firm A sells 1 unit mgmt to Firm B and in exchange gets 3 units admin. • Firm A gains 1 unit admin above its PPF c. And, Firm B can sell 3 units mgmt to Firm A and in exchange gets 1 unit mgmt. • Firm B remains 1 unit admin above its PPF D. Household Example 1. Family Tasks: shopping, cooking, cleaning, fixing, driving a. Does each parent need to learn how to do each task, so that both are doing every task? b. Or, is it easier for each parent to specialize in a few tasks? • Better to specialize and trade. • Ex. “I’ll cook if you clean.” III. What determines Comparative Advantage? A. Trade between Countries, States, or Cities 1. Trade between countries, states, or cities: a. Nature/Vacation (natural endowments) • Colorado has lots of nature, needs low input to create vacation. • Ohio doesn’t have lots of nature, needs lots of input to create vacation • CO, not OH has comparative advantage for vacations b. Low-skilled Labor • Countries with much low-skill labor find it “easy” to make goods requiring low-skills. • Specialize in low-skill labor (i.e. Asia in textiles) 2. Path of Development a. By doing, workers acquire skills and need less time to produce goods • Fashion in Italy: historical accident, then practice reinforces • Semiconductors in Japan: Japan invested and trained workers for this. B. Organization of Workplace 1. Natural Endowments a. IQ b. Social Skills c. Interests 2. Training/Learned skills 09/02/16 Lecture 6: I. Determination of the Market Price A. In trade discussion: 1. Goods are exchanged (bought and sold) at voluntarily agreed prices 2. Price often lies between opportunity cost of the two parties (in our example: the 2 countries or 2 firms) B. Competitive Market (Simplified Model) 1. Market with: a. Standardized product: little to no quality difference between goods • Corn • Neodymium (element) • Soup cans • Binders • Shares of a particular firm b. Many buyers and sellers …..this is called a competitive market c. Many buyers and sellers are “price-taking” • In a perfectly competitive market, the firm is a “price-taker”: meaning it cannot influence the market price through the quantity it produces. • Market Price: Price at which goods are exchanged 2. Price Taking a. Ex. Farmer selling wheat; Sees all farmers selling at $1 per bushel • $1 per bushel is market price • He knows he is just one of many farmers selling wheat • Other farmers and buyers are not noticing what he does • If he raises his price, others will not raise their prices • If he lowers his price, others will not lower their prices b. He cannot affect the market price. So he takes the market price as given. • If he raises his price above the market price, nobody will buy from him • If he lowers the price, it is still just as competitive but he gets less revenue • Key: Doesn’t have to lower his price because: • Everybody else is selling at $1 per bushel • Farmers wheat is as good as everybody else’s wheat • If theirs is selling at $1 per bushel, then so will his • He sells at market price 3. Baker buying wheat a. Sees everybody buying and selling at $1/bushel - Market price • Baker knows he is just one of many • Other buyers and sellers (farmers) are not noticing what he does • If he offers to pay more, prices at which others buy and sell will not change • If he offers to pay less, prices at which other buy and sell will not change b. He cannot affect the market price (just like the farmer in 2). So he takes the market price as given. • If he lowers the price he offers to pay, nobody will sell to him • Do you ever offer to pay less than sticker price at Target? No. • Even if you did they wouldn’t sell to you. • Why would they sell to you for less when they can expect to sell to others at market price (higher than you offer). • If he raises the price he is willing to pay, he ends up paying more than he would if he just bought at expected (market) price, $1/bushel. • He buys at the market price III. Determination of the Market Price A. Price is determined by: 1. a. Eagerness of households to buy (demand side) b. Eagerness of firms to sell (supply side) B. How much do people buy? 1. Depends on: a. Price b. Income c. Price of related goods d. Tastes e. Expectations 2. Concentrate on prices because this is what is determined by the system. 3. Do one thing at a time a. Holds other variables constant b. “Ceteris paribus” - All other things the same 4. Example: Bob a. Ask Bob: • If price is $__ per can. • How much would you want to buy? b. As the price increases, buy less. • Law of Demand 5. Note curves, a curve is a relationship a. y=rad(x) b. Recitation problem set one did not matter which axis x or p fell on. c. Demand curves do not always slope downwards: • Mink’s demand curve for water C. Market Demand Curve 1 . 2 . a. To get market demand, stack the individual demand curves horizontally b. Since each individual demand curve is sloping downward, general market trend is sloping downward.


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