Week 5 Notes (after midterm material)
Week 5 Notes (after midterm material) Econ201
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This 8 page Class Notes was uploaded by Taryn manciu on Friday October 30, 2015. The Class Notes belongs to Econ201 at University of Oregon taught by Keaton Miller in Fall 2015. Since its upload, it has received 18 views.
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Date Created: 10/30/15
Week 5 Tuesday NEW MATERIAL AFTER MIDTERM Econland has been in autarky no trade Free trade means Econland price will go to world price Producers want to supply 1 unit consumers demand 9 units Difference of 8 units made up by imports What happens when Econland enters the world market 1o 9 P 5 1 4 g Qprod 5 1 394 Qcon 5 9 4 6 5 Imports 0 8 8 g CS 125 405 28 2 PS 125 5 12 Gov S 0 0 0 1 0 TS 25 41 16 Econland 012345678910 Econland may wish to impose a tariff a tax that is imposed on imports but not domestic production there is a large tarrif on orange juice 29 cents a gallon that limits entry of bazillion orange juice in the US Suppose a tariff of 2 10 9 8 V 7 P 1 3 2 6 Qprod 1 3 2 2 Qcon 9 7 2 3 2 Imports 8 4 4 1 CS 405 245 16 0 PS 5 45 4 012345678910 GovS 0 8 8 TS Econland 41 37 4 deadweight loss P PWorld tariff tcon 39 Imports with tariff Imports free trade cs minus PS plus GS plus tariff revenue Total Econland surplus minus ie DWL Breakd0wn Qcon too small Qprod too big What about a quota Quota would limit on how many imports could come in Same as quota limitations on milk production in Canada In US sugar quotas limit import of sugar Iwhat quota would affeci price by Quota Imports free trade CSminus PS plus GS zero Total Econland surplus minus ie DWL Breakdown Qcon too small Qprod too big Transfer to foreigners Bottom line on trade in Econland In a perfectly competitive global economy is better 0 overall with free trade in widgets This is not by itself Pareto improvement D people better off s people worse off But with bigger social pie maybe we can make the s people better off The Production Possibility Frontier Looks at two goods at once Shows different production combinations of two goods available to society Example Robinson Crusoe works 8 hours per day in one hour can catch 3 fish or pick one coconut 26 24 22 PPF for Rob1nson Crouse 20 Slope 13 08 Opportunity Cost of one more fish in 016 terms of coconuts C14 How many coconuts you must give up U12 to get one fish n10 If Crusoe can t trade with anyone he 8 is in Autarky u 6 Suppose for now when in autarky ts 4 consumes 12 fish and 4 coconuts 2 o I I O 2 4 6 81i lgh14161820222426 Comparative advantage and international trade Suppose another person named Friday lives on neighboring island Friday work 2 hours per day can collect 12 coconuts or 4 fish per hour Crusoe can catch 3 fish or one coconut per hour Friday has an absolute advantage at both jobs in terms of productivity per hour 26 24 22 Fr1days PPF 20 Slope 3 opp Cost as Opportunity cost of fish for 016 Robinson is 13 coconut vs 3 C14 for Friday um Robinson has a comparative n10 advantage in fish u 8 Friday has a comparative t 5 advantage in coconuts s 4 39 2 0 0 2 4 6 81i ls2h14161820222426 SPECIAIZATION CAN MAKE BOTH BETTER OFF 26 24 22 20 38 016 314 L 2 n10 u839 t539 s4quot 2 o o 2 4 6 81i1s2h14161820222426 By specializing in their competitive advantages they are both better off which allows them to consume higher production Comparative advantage in trade Under trade based on comparative advantage Low skill country specialize in laborintensive work assemble sneakers High skill high capital country do design marketing engineering Increasing returns and gains from trade 26 24 22 New person Shackleton 20 Opportunity cost of one 08 more fish falls as fish production increases a 6 Learn by doing Cl 4 39 ack of all trades but Lil 2 master of nonequot n1 o u 8 39 t 6 4 S 2 PPF 0 Impacts of policy depends on type of trade Comparative advantage trade RobinsonFriday Analysis of tariffs quotas and protectionists policies lower total surplus benefit suppliers Increasing returns trade Shackleton 1 Shackleton 2 General analysis much more complex Easy to see protectionist polices might screw things up build wall between 1 and 2 hurts both However can write down model where strategic trade policy benefits a country Caveats politicians liable to use this argument for cover and government may not be able to pic winners and losers Week 5 Thursday Public Goods and Consumer Theory Private Goods in Econland The widget is a private good Private goods have two major characteristics Rival in consumption rivalrous ifI consume the good you cant Excludable people can be prevented from consuming the good Some goods may be nonrival in consumption One person consulting the good doesn t take anything away from another s ability to consume Tornado siren nonexcludable everyone in the area will hear it you cant prevent it Watching a TV show if I go online and watch a show that doesn t prevent anyone else from going online and watching the same show Public goods combine these two characteristics Public goods are nonrival and nonexcludable Tornado sirens Street lamps everyone on the street can see the light National defense Research if no patents Music if no intellectual property production These days newspaper reporting The rule of efficient provision of private goods is simple Private good rule should make another unit of output and give it to a person if that persons marginal willingness to pay exceeds the marginal cost What about public goods Suppose Econland has no sun Proposal build an artificial sun will light all of Econland Cost 20 What is willingness to pay For public goods add willingness to pay of each person together If artificial sun is built everyone enjoys it Social marginal benefit from building the sun is 987 45 Cost is only 20 Socially efficient to build the artificial sun Free market cant deliver this good efficiently Free rider problem its worth it to do the project but no one person is willing to Put up the whole amount to do it themselves Everyone wants to benefit but doesn t quite value it enough boy they should fix thatquot Government can have a role in production of public goods Econland have government apply head tax D1D4 5 each leads to Pareto improvement Realland Government taxes everyone and builds roads national defense Other ways to produce public goods Assurance contracts I pledge to contribute 5 if enough pledges are made Main problem contract enforcement how can we guarantee that the things we give money to fund projects are going to get done Common resources are nonexcludable and rivalrous World fishing stocks how do you stop people from fishing the ocean Parks how do you prevent people from hanging out at Crater Lake Tragedy of the Commons great public resource exists but is overused and disappears Budget constraints Tells us what the consumer can do what does the consumer want to do Depends on the preferences of the consumer Consumer will get different utility from different combination of beer and pizza Iowa Hawkeye follows perfect substitutesquot get utility from calories Pizza 200 Cal and beer is 200 Cal Utility 200Qpizza 200Qbeer What bundle maximizes utility Indifference curves combinations of beer and pizza that give the same utility the consumer is indifferent between any atwo bundles of goods on the indifference curve
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