Micro 4
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The document discusses microeconomic concepts related to tradeoffs, comparative advantage, and the market system. It provides examples showing how individuals and countries can benefit from voluntary exchange by specializing and trading based on their comparative advantage. Specializing allows both parties to gain by producing at a lower opportunity cost and trading to achieve more than they could alone through exploiting their comparative advantages.
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Micro 4
- 2. Microeconomics Lecture 4 Tradeoffs, Comparative Advantage, and the Market System
- 3. Questions?
- 4. Price System is a Knowledge System
- 5. Voluntary Exchange buyer and seller both win
- 6. Every ExchangeOne Price Two values Buyer value Seller value
- 7. Buyer Seller $120 $80 PriceValue Range Too High Too Low many sellers no buyers many buyers no sellers
- 8. Seller Buyer $120 $80 No Overlap No Common Value Range No Market Least Most
- 11. How many marshmallows would you have in 24 hours if you started with one and they were doubled every 15 minutes?
- 12. 2 96 The number of marshmallows would fill 1,200 earths
- 13. Absolute Advantage Produce more with the same amount of inputs
- 14. Comparative Advantage Produce at a lower opportunity cost
- 15. David Ricardo (1772 - 1823) Principles of Political Economy andTaxation Comparative Advantage
- 17. The basis for trade is comparative advantage, not absolute advantage.
- 19. Gale Ali Total Hours Make a Hook 3 2 5 Catch a Fish 4 1 5 Total Hours 7 3 10 No Trade 2 Hooks and 2 Fish 10 Hours - 5 Hours per Fish
- 20. Gale Ali Total Hours Make a Hook 2 hooks 6 hours 6 Catch a Fish 2 fish 2 hours 2 Total Hours 6 2 8 With Trade 2 Hooks and 2 Fish 8 Hours - 4 Hours Per Fish
- 22. Comparative Advantage my opportunity cost is lower than your opportunity cost
- 23. Comparative Advantage I don’t have to give up as much as you do
- 24. Who should mow my lawn? Me - one hour Son - three hours
- 25. Who should mow my lawn? Who is best is not important Must know the opportunity costs
- 26. Me - Can earn $100 doing economics Son - Can earn $10 working at McDonalds
- 27. Who every has a lower opportunity cost has a comparative advantage. The son has a lower opportunity cost
- 28. Hawaii Idaho
- 29. Pineapples Potatoes 24 0 20 1 16 2 12 3 8 4 4 5 0 6 Ratios 24 to 6 4 Pineapples for 1 Potato 6 to 24 1/4 Potato for 1 Pineapple Pineapples Potatoes 6 0 5 5 4 10 3 15 2 20 1 25 0 30 Ratios 6 to 30 1/5 Pineapples for 1 Potato 30 to 6 5 Potatoes for 1 Pineapple Hawaii Idaho
- 30. 24 30 6 6 Potatoes15 12 3 3 9 15 18 21 9 12 18 21 24 270 0 27 Should Idaho and Hawaii Trade?Pineapples Hawaii PPF Idaho PPF Pineapples Potatoes 6 0 5 5 4 10 3 15 2 20 1 25 0 30 Pineapples Potatoes 24 0 20 1 16 2 12 3 8 4 4 5 0 6 Hawaii Idaho Pineapples Potatoes Hawaii 12 3 Idaho 3 15 Total 15 18
- 31. Internal Price Pineapples Potatoes Idaho 5 Potatoes 1/5 Pineapple Hawaii 1/4 Potato 4 Pineapple
- 32. No Trade Pineapples Potatoes Idaho 3 15 Hawaii 12 3 Total 15 18
- 33. Specialize Pineapples Potatoes Idaho 0 30 Hawaii 24 0 Total 24 30
- 34. Analysis Pineapples Potatoes No Trade Totals 15 18 Specialize Totals 24 30 Gain +9 +12
- 35. Trade Pineapples Potatoes Idaho 3 to 12 = +9 15 Hawaii 12 3 to 15 = +12 Total 24 30
- 36. 24 30 6 6 Potatoes15 12 3 3 9 15 18 21 9 12 18 21 24 270 0 27 Should Idaho and Hawaii Trade?Pineapples Hawaii PPF Idaho PPF Idaho gains 9 Pineapples Hawaii gains 12 potatoes
- 37. Slope Percentage Change Relationships Cause and Effect Areas
- 38. Notation % Percent Change % Percentage Change
- 39. % Percentage Change New - Old Old = = .4 = 40%7 - 5 5 2 5
- 40. 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
- 41. 10 Questions 1. What is Utility? 2. What are the four elements in the circular flow diagram? 3. What is the difference between micro and macro? 4. What is the difference between positive and normative? 5. What is opportunity cost? 6. What is your highest alternative? 7. What is comparative advantage? 8. Do you have a comparative advantage over Bill Gates? 9. What is wealth? 10. What is the difference between the economics ideas of Adam Smith and Karl Marx?