Introductory Microeconomics ECON 1110
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This 36 page Class Notes was uploaded by Dr. Shawn Emmerich on Saturday September 26, 2015. The Class Notes belongs to ECON 1110 at Cornell University taught by R. Burkhauser in Fall. Since its upload, it has received 82 views. For similar materials see /class/214351/econ-1110-cornell-university in Economcs at Cornell University.
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Date Created: 09/26/15
112 Cornell University Econ 1110 Introduction to Microeconomics Professor Richard V Burkhauser Thinking Like an Economist Cornell University Key Concepts 0 circular ow diagram p 24 0 production possibilities frontier p 26 microeconomics p 28 macroeconomics p 28 0 positive statements p 30 normative statements p 30 Econ 1110 Professor Burkhauser Figure 21 The Circular Flow MARKHS Revenue ow Spending GOODSAND SERV CES Gum Fuma sen and semcea 39HWSEWWS buy sum Fanny u vuducuun MARKHS Lab 39r am R agd39cama FANORS OF PRODUCTION Wages yen H and pvu t usehu ds 52H me5 buy ncums Huwuhnpms anduurputs A HuwumuHays Cornell University Question 21 Scarcity It is said that the US is an economy of scarcity This statement a V is false because the US is one of the richest countries the world has ever known Caquot V is false because the resources that are scarce in the US can always be imported from abroad c is true because our resources are not suf cient to realize all of our goals 8 is true but only temporarily 7 in the future we will probably have adequate resources to achieve all our goals Econ 1110 Professor Burkhauser Table 21 Production Possibilities Cars Wheat Opportunity Cost Wheat Cars A 0 18 B 1 17 1 C 2 15 2 D 3 12 3 E 4 7 5 F 5 0 7 Figure 22 Production Possibilities Frontier Infeasible point 12 D W Inefficient 39 point a Cornell University The Production Possibilities Frontier The frontier is concave The opportunity cost in lost wheat production increases as the society produces more and more cars To produce the first car the least productive workers in wheat farming relative to car production are switched from wheat to car production To increase car production further more productive farmers are moved from farming to car production So that each additional car produced costs the society more in wheat production than the previous unit opportunity cost Econ 1110 Professor Burkhauser Figure 23 Shifts in the Production Possibilities vF o 5 More inputs land labor capital Technological advances Question 22 Opportunity Cost The following table gives the production possibilities for a country that can produce either avocadoes or oranges Avocadoes Oranges The opportunity cost of producing 0 13 the second avocado in terms of oranges 1s 1 8 a 0 2 4 b 1 3 1 C 4 d 6 0 4 e 8 Econ 1110 Professor Burkhauser a Cornell University Question 23 Production Possibilities Frontier Production possibilities frontiers are usually bowed outward This is because a the more resources a society uses to produce one good the fewer resources it has available to produce another good b it re ects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced c of the effects of technological change d resources are specialized That is some are better at producing particular goods rather than other goods Econ 1110 Professor Burkhauser Cornell University Question 24 Revealed Preference Mary and Jane both graduated from Cornell with PhDs in economics last year Both were offered teaching jobs at Harvard this year at 100000 Mary accepted the offer but Jane got married and is now a homemaker 1f war breaks out in Syria and Mary and Jane are drafted into the Army what is the best estimate of the cost to society of drafting these two women at a salary of 40000 each a b 8 3 80000 the total army salary paid 100000 because this is the market value of output lost in the private economy due to the draft and e social loss in productiv1 1ary s 100000 35000 which is the cost Jane s husband must pay for a livein maid 20000 because this is the difference between the social gain in the army ty At least 200000 because the value of lane s services as a homemaker must be at least 100000 Econ 1110 Professor Burkhauser a Cornell University Question 25 Opportunity Cost 0 A dentist purchased one ounce of gold in 2000 when gold was selling for 300ounce She has kept the gold ever since Today gold is valued at 600ounce The opportunity cost of using this gold now a b V 88 is 300 is 300 plus the interest she could have earned in the next best use of that 300 over the past 6 years is 600 depends on the use she will put the gold to Econ 1110 Professor Burkhauser Cornell University Question 26 Opportunity Cost Last year Delta airlines purchased and stored 1 million gallons of aviation fuel at a time when aviation fuel was selling for 200 per gallon Aviation fuel is now valued at 300 per gallon The opportunity cost of using this stored fuel now a b e V d V is 2M is 3M is 2M plus the interest Delta could have earned in the next best use of that 2M over the past year depends on the use to which Delta will put the fuel Econ 1110 Professor Burkhauser 3 Cornell University Econ 1110 Introduction to Microeconomics Professor Richard V Burkhauser Interdependence and the Gains from Trade Key Concepts 0 absolute advantage p 54 opportunity cost p 54 comparative advantage p 55 imports p 58 exports p 58 Econ 1110 Professor Burkhauser a L W 3941 JJ 239 n I v 411 An 5 Amnmn xix nu quot 3951 qi gm rum wumuos mmm 1131de lm k u a Cornell University Question 31 Wealth of Nations 0 To increase the Wealth of Nations or to reduce poverty it is most important to a ensure that people who work hard never lose their jobs b ensure that no rms that produce valuable services go out of business v C v ensure that consumers receive the goods and services they are most Willing and able to pay for at the lowest price 8 ensure that stockholders receive a positive return on their investment Econ 1110 Professor Burkhauser Table 31 Farmer s Pr tion Possibilities Production Opportunity Cost Meat Potatoes PotatoesMeat MeatPotatoes 0 32 1 28 4 2 24 4 3 20 4 4 16 4 5 12 4 6 8 4 7 4 4 oo o J S Table 32 Rancher s Pro ction Possibilities Production Opportunity Cost Meat Potatoes PotatoesMeat MeatPotatoes 0 48 1 46 2 2 44 2 o o o o 23 2 2 Table 33 Production Possibilities of the Farmer and the Rancher Meat Potatoes Farmer 8 oz 32 oz Rancher 24 oz 48 oz Absolute Advantage Refer to Table 33 o The comparison among producers of a good according to their productivity that is absolute advantage Describes the productivity of one person rm or nation compared to that of another The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good Econ 1110 Professor Burkhauser Table 34 Opportunity Costs of Meat and Potatoes Opportunity Cost of 1 oz of Meat 1 oz of Potatoes Farmer 4 oz potatoes 14 oz meat Rancher 2 oz potatoes 12 oz meat Cornell University Opportunity Cost and Comparative Advantage Compares producers of a good according to their opportunity cost that is whatever must be given up to obtain some item 0 The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good Econ 1110 Professor Burkhauser Cornell University Question 32 Absolute Advantage 0 Who has the absolute advantage a v Rancher in meat production and farmer in potato production 6 v Rancher in potato production and farmer in meat production 0 v Rancher in both meat and potato production 8 Farmer in both meat and potato production Econ 1110 Professor Burkhauser Cornell University Question 33 Comparative Advantage 0 Who has the comparative advantage a v Rancher in meat production and farmer in potato production 6 v Rancher in potato production and farmer in meat production 0 v Rancher in both meat and potato production 8 Farmer in both meat and potato production Econ 1110 Professor Burkhauser a Cornell University Comparative Advantage and Trade 0 Comparative advantage and differences in opportunity costs are the basis for specialized production and trade 0 Whenever potential trading parties have differences in opportunity costs they can each benefit from trade 0 Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage Econ 1110 Professor Burkhauser Figure 31 The Farmer s Pro ction Possi I I Ies Curve Meat ounces Say the farmer absence of trade 0 16 32 Potatoes ounces Figure 32 The Ra her s Pro Meat ounces I I Ies Curve Suppose we rancher chooses ms absence of trade 48 Potatoes ounces Table 35 No trade example Flmr Ranchur Tall lent WI Hell Pm lent PMquot Without Trldl Pmduclion and mummy 40 1501 1201 240 16m 40m Table 36 Combined Pro uction Possibilities Farmer Rancher Both Opp Meat Potatoes Meat Potatoes Meat Potatoes Cost 0 32 0 48 0 80 2 1 28 1 46 1 78 2 4 16 0 0 5 12 12 24 16 48 2 8 0 16 16 2 o 18 44 2 24 0 2 20 40 2 2 24 32 2 25 28 4 26 24 4 Figure 3 Int Production POSSI I I Ies of the Rancher and the Farmer 32 quot3953 Joint ounces so Potatoes ounces ble 37 Gains m Trade Example WilhoutTmh Pmduuion Ind mum 4a 1601 120 240 16a 4002 Wllh Trldl PunditMun 001 3201 1am 12m 1811 4452 Gets Guns Givss Tm 5 oz 15 oz 5 oz 15 oz Comun nn Enz 1701 1601 2701 18x11 Mal GunImma A B A B Inalulu Consumman 10 10 19 3a 2a 30 a Cornell University Question 3 4 Comparative Advantage and Trade 0 The table below gives the number of automobiles and computers that can be produced in Japan and the USA by employing the same amount of productive resources 39 Automobiles Computers Japan 8 4 USA 18 6 Based on opportunity cost of resources the USA should a Import automobiles and export computers b Export automobiles and import computers c Import both automobiles and computers and export nothing d Export both automobiles and computers and import nothing Econ 1110 Professor Burkhauser Cornell University Question 35 Comparative Advantage and Trade 0 The table below gives units of computers and cattle that can be produced in the USA and Mexico if both countries use the same amount of all relevant resources Computers Cattle USA 15 30 Mexico 3 10 Based upon the theory of comparative advantage the USA should a Import computers and export cattle b Import cattle and export computers c Import nothing because it has a comparative advantage in both d Export both goods because it has an absolute advantage in both Econ 1110 Professor Burkhauser a Cornell University Question 36 Comparative Advantage and Trade 0 The table below gives units of automobiles and wheat that can be produced in the USA and China if both countries use the same amount of all relevant resources Automobiles Wheat USA 10 50 China 5 10 Based upon the theory of comparative advantage the USA should import automobiles and export wheat import wheat and export automobiles import nothing because it has a comparative advantage in both export both goods because it has an absolute advantage in both 8853 Econ 1110 Professor Burkhauser a Cornell University Question 37 Comparative Advantage and Trade 0 The table below gives units of automobiles and computers that can be produced in the USA and China if both countries use the same amount of all relevant resources Automobiles Computers USA 20 40 China 4 5 Based upon the theory of comparative advantage the USA should import automobiles and export computers import computers and export automobiles import nothing because it has a comparative advantage in both export both goods because it has an absolute advantage in both 8853 Econ 1110 Professor Burkhauser
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