ECON 2020 (Dr. Macy Finck) September 12-16
ECON 2020 (Dr. Macy Finck) September 12-16 Econ 2020
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This 14 page Class Notes was uploaded by Gabrielle Ingros on Sunday September 18, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 10 views. For similar materials see Principles of Economics: Microeconomics in Economics at Auburn University.
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Date Created: 09/18/16
ECON 2020 Lecture 2: Trade Markets Fish Coconuts Two tables represent two economies o Every time we work a trade problem, Them 10 20 the opportunity cost will be constant so you only need the two end points Us 12 48 Trade: Fish Coconuts Them 10 20 Opportunity Cost of a Us 12 48 Coconut Opportunity Cost of a Fish o They will produce 10 fish OR 2C ½F 4C ¼ F 20 coconuts o We will produce 12 fish OR 48 coconuts Absolute Advantage – the ability to produce more in a given time frame o Which economy should produce each good? Comparative Advantage – the ability to produce at a lower marginal (additional) opportunity cost Opportunity Cost of Good X = Quantity of Y/Quantity of X o They: 20/10 = give up 2C every time they produce 1 fish Give up ½ fish every time they produce 1 coconut o Us: 48/12 = give up 4C every time we produce 1 fish Give up ¼ fish every time we produce 1 coconut The Comparative Advantages will always be split between two markets o So let them produce fish and we will produce coconuts (choose the lower opportunity cost to determine who produces what) Drawing Graph of above tables – Production: assume that the economies completely specialize according to their comparative advantage ECON 2020 o P = production o Production (write down coordinates): Them = (10F, 0C) and Us: (0F, 48C) Production and Consumption: GIVEN: o Assume that the economies agree to trade 3 coconuts for each fish traded o Assume that the fishproducing economy is willing to trade 4 fish for coconuts How much of each good will each economy produce and consume? Production: o Them: 10 fish and 0 coconuts o Us: 0 fish and 48 coconuts Trade: o They export (we import) 4 fish o We export (they import) 12 coconuts Consumption: o Them: produce 10 fish – send 4 fish = 6 fish o Them: produce 0 coconuts + import 12 coconuts = 12 coconuts Them: 6 fish and 12 coconuts o Us: produce 0 fish + import 4 fish = 4 fish o Us: produce 48 coconuts – 12 coconuts = 36 coconuts Us: 4 fish and 36 coconuts o Add these numbers back together to check if correct i.e. (them: 6 fish + us: 4 fish = 10 fish) i.e. (them: 12 coconuts + us: 36 coconuts = 48 coconuts) Back to graph: ECON 2020 Consumption: o Them: 6 fish and 12 coconuts o Us: 4 fish and 36 coconuts Example #2 o Goods are grits and shrimp o This economy is producing 60 grits and 0 shrimp Production: 60 grits and 0 shrimp Consumption: 30 grits and 15 shrimp Exports = production – consumption o Exports: 60 30 = 30 grits Imports = consumption – production o Imports: 15 – 0 = 15 shrimp Terms of Trade for Import = export/import o 2 grits : 1 shrimp International trade arises primarily from Comparative Advantage ECON 2020 If we have a Comparative Advantage in production, we will export the good. If not, we will import the good. Lecture 3: International Trade Markets Export Markets Graph: o Sd = supply domestic & Qd = demand domestic o Pn = noprice equilibrium & Qn = notrade equilibrium When the market opens to free trade, international consumers are added to demand o Dw = world demand & Pw = world price & Qs = domestic production ECON 2020 o Qd = domestic consumption Note: identify this market as an export market (because there is world demand and the world price is higher than the noprice) Note: identify the number of units that are being exported Note: identify the changes in social welfare by measuring changes in consumer and producer surplus o Subtract B from C US exports = Qs – Qd ECON 2020 Lost consumer surplus = Pw,A,C,Pn (“upside down boat”) Gained Producer surplus = Pw,B,C,Pn (“right side up boat”) ECON 2020 Net welfare gain = A,B,C o Consumers are worse off, but producers are so well off that the net welfare gain still increases (“the pie is getting bigger”) Import Markets Graph: ECON 2020 o Pn = noprice equilibrium & Qn = notrade equilibrium o When the market opens to free trade, international producers are added to supply o US Imports = Qd – Qs o Qd = domestic consumption Identify as import market (world supply and the world price is lower than the no price) o Lost Producer Surplus = Pn,A,C,Pw o Gained Consumer Surplus = Pn,A,B,Pw o Net Welfare Gain = A,B,C ECON 2020 Types of Trade Restrictions: o Tariff – a tax levied on goods imported into a county o Import Quota – a specific limit or maximum quantity of a good permitted to be imported into a country during a given period Impact of a Tariff graph: o Pw + t = world price plus tariff o Pretariff imports = Qd – Qs ECON 2020 o PostTariff imports = Qd1 – Qs1 o Number of imports is shrinking (blue line to pink line) o A = gained producer surplus (much smaller than lost consumer surplus) The government is now earning T on every unit imported into this market (tax x imports) o B = gained tax revenue ECON 2020 o C = deadweight loss (how much worse off we are as a society when a tariff is placed on the import market) How many units imported before tariff? (blue) How many after? (pink) o Value of Tariff = (Pw + t) – (Pw) = T Tariff vs. Quota: o Import quotas have a similar impact, except area B goes to foreign producers rather than the U.S. government o With tariffs, foreign producers with the lowest costs will import the most o With quotas, only foreign producers with permission may import, regardless of costs Lecture 4: Elasticity Elasticity – a measure of the relative responsiveness of one variable to a change in another Price Elasticity of Demand – the ratio of the percent change in the quantity demanded to the percent change in the price ∆Qd E d= ∆P o Note: Ed is always negative, but just ignore the negative sign ∆Qd ∆Qd= originalQd ∆ P= ∆P originalP o Convert to % by multiplying by 100 ECON 2020 Example: o When the price of a good has fallen from $10 to $8, the Qd increases from 200 to 250. Find Ed. %ΔQd = (250 – 200)/200 = .25 %ΔP = (10 – 8)/10 = .2 Ed = .25/.2 = 1.25 Midpoint Formula: 2 Q +Q 1 ¿ ¿ ¿ 2 ¿ ¿ (Q 2Q 1) ¿ ∆Qd Midpoint Forumla= Avg.Qd =¿ ∆P Avg.P Example #1 (Using numbers from previous example): o Ed = (50/225)/(2/9) = .222/.222 = 1 Example #2: o Ed = 1.2 o Qd = 100,000 o P = $0.50 What is the ΔQd when ΔP is $0.05? o Solution: 1.2 = (ΔQd/100,000)/(.05/.50) = 1.2 = ΔQd/100,000 = 12,000 So, ΔQd = 12,000 Units Possible Elasticity Coefficients: o Perfectly Elastic – Ed = infinity (a tiny change in P causes an infinite change in Qd) ECON 2020 o Elastic – Ed > 1 (%ΔQd > %ΔP); flat o Unit Elasticity – (%ΔQd = %ΔP) Nothing really happens; boring o Inelastic – Ed < 1 (%ΔQd < %ΔP); steep ECON 2020 Sin Taxes – taxes on “bad” goods such as alcohol & cigarettes o Perfectly Inelastic – Ed = 0 (a huge change in P causes no change in Qd)
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