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101 lecture 2 101 lecture 2 Presentation Transcript

  • Microeconomics Lecture 2 Trade-offs, Comparative Advantage, and the Market System
  • Yabut
  • Intent Result
  • Fell Pushed Jumped Result the same
  • Utopia vs. Reality Reality always loses Realistic Alternatives
  • Utility a measure of happiness or satisfaction
  • Snickers Test of Utility
  • Change Incentives Change Behavior Speed Camera Lottery
  • Positive What is Normative What ought to be Fact Values
  • Facts True or False Values Good or Bad
  • Markets Where Buyers and Sellers Trade
  • Households Individuals in a home Sell Factors of Production Buy Goods & Services
  • Firms Buy Factors of Production Sell Goods & Services
  • Product Markets Markets for finished goods and services - Stores -
  • Factor Markets Markets for goods and services used to make products
  • Labor Capital Natural Resources Entrepreneurs Spending Wages & Payments for Factors Goods & Services Households Firms Factor Markets Product Markets
  • Absolute Advantage Produce more with the same resources Comparative Advantage Produce at a lower opportunity cost
  • David Ricardo (1772 - 1823) Principles of Political Economy andTaxation Comparative Advantage
  • The basis for trade is comparative advantage, not absolute advantage.
  • Gale Ali Total Hours Make a Hook Catch a Fish Total Hours 3 2 5 4 1 5 7 3 10 No Trade 2 Hooks and 2 Fish 10 Hours - 5 Hours per Fish
  • Gale Ali Total Hours Make a Hook Catch a Fish Total Hours 2 hooks 6 hours 6 2 fish 2 hours 2 6 2 8 With Trade 2 Hooks and 2 Fish 8 Hours - 4 Hours Per Fish
  • Opportunity Cost The highest valued alternative
  • Saudi Idaho
  • Dates Potatoes 24 0 20 1 16 2 12 3 8 4 4 5 0 6 Ratios 24 to 6 4 Dates for 1 Potato 6 to 24 1/4 Potato for 1 Date Dates Potatoes 6 0 5 5 4 10 3 15 2 20 1 25 0 30 Ratios 6 to 30 1/5 Dates for 1 Potato 30 to 6 5 Potatoes for 1 Date Saudi Arabia Idaho
  • 24 30 6 6 Potatoes15 12 3 3 9 15 18 21 9 12 18 21 24 270 0 27 Should Idaho and Saudi Trade?Dates Saudi PPF Idaho PPF Dates Potatoes 6 0 5 5 4 10 3 15 2 20 1 25 0 30 Dates Potatoes 24 0 20 1 16 2 12 3 8 4 4 5 0 6
  • Internal Price Dates Potatoes Idaho 5 Potatoes 1/5 Date Saudi 1/4 Potato 4 Dates
  • No Trade Dates Potatoes Idaho 3 15 Saudi 12 3 Total 15 18
  • Specialize Dates Potatoes Idaho 0 30 Saudi 24 0 Total 24 30
  • Analysis Dates Potatoes No Trade Totals 15 18 Specialize Totals 24 30 Gain +9 +12
  • Trade Dates Potatoes Idaho 3 to 12 = +9 15 California 12 3 to 15 = +12 Total 24 30
  • 24 30 6 6 Potatoes15 12 3 3 9 15 18 21 9 12 18 21 24 270 0 27 Should Idaho and Saudi Trade?Dates Saudi PPF Idaho PPF Trade PPF Idaho gains 9 Dates California gains 12 potatoes
  • Slope Percentage Change Relationships Cause and Effect Areas
  • Notation % Percent Change % Percentage Change
  • % Percentage Change New - Old Old = = .4 = 40%7 - 5 5 2 5
  • Last year the price was $6. This year the price is $9. What is the percentage change? New - Old Old = = .5 = 50%9 - 6 6 3 6
  • California Culture or Syria Culture