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Micro Econ

by: Tori Busa

Micro Econ ECON 1102

Tori Busa

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About this Document

production possibility curve and outsourcing
Microeconomic Principles
John DiLeonardo
Class Notes
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This 2 page Class Notes was uploaded by Tori Busa on Monday October 10, 2016. The Class Notes belongs to ECON 1102 at Temple University taught by John DiLeonardo in Fall 2016. Since its upload, it has received 4 views. For similar materials see Microeconomic Principles in Economics at Temple University.


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Date Created: 10/10/16
Microeconomics Chapter 2 Production Possibilities Model  List a choices of opportunity cost by summarizing what alternative outputs you can achieve with your inputs  individuals specialize in the production of goods for which they have a comparative advantage  Output=result of activity  Input=what you put into production process  The principle of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on the activity. (specialization)  The production possibility curve focuses on efficiency and ignores distribution  A resource has comparative advantage if it has the ability to be better suited to the production of one good than another. If a method of production will change income distribution, we cannot determine if that method is efficient or not  Productive efficiency= achieving as much output as possible from a given amount of inputs or resources. (Technology/ resources = parallel shift change)  1. On the curve= efficient 2. Right of the curve= unattainable 3. Left of the curve= inefficient Outsourcing  Outsourcing=the relocation of production once done in the US to foreign countries  Occurs when many countries have comparative advantage in labor costs EX: US has comparative advantage in technology, institutional structure and specialized knowledge Globalization  Globalization =the increasing integration of economies, cultures, and institutions across the world  It provides larger markets than the domestic economy (+)  Increases number of competitors and increased competition (-) Comparative Advantage  EX: US comparative advantage in innovation results in higher wages  As industries mature & move to lower wage countries EX: Verizon  To keep comparative advantage, US exchange rate will decline and foreign wages increase to make US exports cheaper and imports more expensive Trade Microeconomics  When people freely enter into trade, both parties can be expected to benefit from trade  Without trade each country can only consume combos of goods along their PPCs  If countries specialize according to comparative advantage and trades, they can consume beyond their PPCs  Combined PPC with trade=the slope of the combined PPC determined by the country with the lowest opportunity cost The law of one price  The law of one price =the wages of equal workers in one country will not differ significantly from the wages of workers in another institutionally similar country EX: If US loses its comparative advantage based on technology and institutional structures, US wages will decrease relative to wages in many other countries  Reality is that citizens in the US have been living better than it could have otherwise because of trade and outsourcing Summary  PPC embodies the opportunity cost concept  Increasing marginal opportunity cost exists  Trade allows people to use their comparative advantage and shifts out society’s combined PPC  Efficient, inefficient and unattainable points on the PPC  Through specialization and trade, countries can increase consumption  Typical outward bow of PPC is the result of comparative advantage and trade  Because many goods are cheaper to produce in foreign countries, production of goods formerly in the US is being out outsourced  Outsourcing is the product of the law of one price  Globalization is the increasing integration of economies, cultures, and institutions across the world


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