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Ch. 2 Notes - Trade offs, Comparative Advantage, and the Market System

by: Caroline Jok

Ch. 2 Notes - Trade offs, Comparative Advantage, and the Market System ECON 1011

Marketplace > George Washington University > Economcs > ECON 1011 > Ch 2 Notes Trade offs Comparative Advantage and the Market System
Caroline Jok
GPA 3.8
Principles of Economics I
Foster, I

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About this Document

Economics Foundations and Models Chapter 2, Week 2 Notes from the Hubbard & O'Brien - Microeconomics textbook.
Principles of Economics I
Foster, I
Class Notes
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This 3 page Class Notes was uploaded by Caroline Jok on Friday September 11, 2015. The Class Notes belongs to ECON 1011 at George Washington University taught by Foster, I in Fall 2015. Since its upload, it has received 107 views. For similar materials see Principles of Economics I in Economcs at George Washington University.


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Date Created: 09/11/15
Economics 1011 Foundations and Models Ch 2 Notes Tradeoffs Comparative Advantage and the Market System Hubbard amp O Brien Microeconomics Scarcity requires T raa eo fs Scarcity unlimited wants exceed limited resources Factors of Production workers capital natural resources entrepreneurial ability 21 Production Possibilities Frontiers and Opportunity Costs Production Possibilities Frontier PPF Curve which exhibits the max possible combinations of 2 products that may be produced with available Factors of Production Graphing the Production Possibilities Frontier Point A combination of products On the Line Utilizes all resources highest efficiency Below the line ineff1cient combination Not all resources are used Above the line Unattainable combination Opportunity cost Highest valued alternative that is relinquished Increasing Marginal Opportunity Cost If curve is bowed Opportunity cost depends on state of the economy increasing Marginal Opportunity cost experienced moving down the PPF The more resources devoted to an activity the smaller the payoff to devoting additional resources to that activity Economic Growth Total resources are fixed Make more of one you must make less of the other if line shifts outward Display of Economic Growth and vice versa 22 Comparative advantage and Trade Trade sellingbuying Direct One thing for another Indirect Sell labor services money for goods Possibility to become better off by increasing both production amp consumption Specialization and Gains from Trade Though two parties may have the ability to produce the same goods sometimes it is more beneficial to trade for these goods Absolute Advantage versus Comparative Advantage Absolute advantage ability of one party to produce more of a good or service than competitors w same costs Comparative advantage ability of one party to produce a goodservice at a lower opportunity cost than competitors THE BASIS for TRADE is COMPARATIVE advantage not absolute advantage It is possible to have Absolute Advantage Wo Comparative Ad It is possible to have Comparative Ad Wo Absolute Ad 23 The Market System Market buyers and sellers trade Product Markets For goods and services Households Demand Firms Supplier Factor Market for factors of production Factors of production inputs to make goodsservices Labor all types of work Capital physical material Natural Resources gifts of nature Entrepreneur operates a business Entrepreneurial Ability ability to bring together other factors of production to successfully produce and sell goods and services The Circular Flow of Income Household all the individuals in a home Supply factors of production esp labor Employed by firms use income to purchase goodsservices All rms are owned by households one to millions Factor market Supplier suppliers of goods services revenue to buyhire factors of production Factor market demander Shown in a Circular flow diagram Leaves out government buying goods from firmsmaking payments leaves out banks bonds amp financial system leaves out foreign markets The Gains from Free Market Free Market government places FEW restrictions on how goodsservices are produced sold or on employment govintervenes in all modern economies more than is consistent w fully free market Sees more success amp rising living standards Centrally Planned extensive government control Market Mechanism invisible hand assumption individuals usually act in rational self interested way consumers control what rms do Self interest of rms responds to the consumers wishes prices must be exible Firms respond individually to changes in prices by making decisions that collectively end up satisfying the wants of consumers The Role of the Entrepreneur determines goods services they believe are in demand how to produce those goods services most pro tably nd opportunities take risks Legal Basis of a Successful Market System Property rights rights individuals rms have to exclusive use of their property INCLUDING the right to buy sell it Property Tangible or ideas ie intellectual property rights patent gives inventor exclusive rights to produce sell new product for 20 years


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