ECON1101 Lecture Notes - Lecture 1: Grundrisse, Opportunity Cost, Comparative Advantage
Kristy
ECON1101
Comparative Advantage & the Basis for Trade
- Model simplified rep of reality- 2 productive activities + 2 indiv: when trading no transaction costs
(negotiation/transportation) or other barriers (import quotas/tariffs)
- Economics: the study of choice in a world of unlimited wants and scarce resources
- Scarcity and trade-offs
- Ratio of production over input (hours)- amount of resources used to perform a productive activity
determines productivity
- Opportunity cost: value of next best alternative to taking a particular action
- Amount of resources used to perform a productive activity determines productivity
- Resources are scarce – operate in a constrained environment (financial/time)
- Extreme → intermediary → PPC (rep all max output possibilities of
resources with given set of inputs if inputs are used efficiently)
- Efficient production pt: rep combo of g for which currently
available resources do not allow an increase in production of one g
w/out reduction in the production of the other (pts on PPC rep
efficient) VS. inefficient
- Attainable production pt: rep any combo of g that can be produced
w currently available resources vs. unattainable
- Production entails consumption: neo-classical eco/supply side eco
- Keynes: demand side eco: Grundrisse 81-120
- Opportunity cost: since agents have unlimited wants + limited capacity to meet these wants (ie
limited time) we have the inevitable result of scarcity. If we want x we must give up y. thus OC is
the fundamental guide to rational decision making by agents. OC is expressed in a common
denominator to facilitate the comparison of competing/ ME events. OC concept is the ‘cost’ in the
cost-benefit principle
- Cost-benefit principle: an (rational) indiv should take an action if, and only if, the extra benefits from
taking the action are at least as great as the extra costs
- Eco surplus: benefit of taking any action minus its cost- goal to maximise eco surplus
- OC= explicit cost + implicit cost
- OC(x)= loss in good y/gain in good x = alpha (units of y)
o Change in y/ change in x = gradient/slope
- Factors causing PPC to change: change in level of resources, technological change, labour force
change
- Parallel vs non-parallel shifts
- Opportunity cost, comparative advantage illustrate the benefits of trade
- What basic methodology is involved in identifying the benefits of trade? Comparing eco outcomes w
trade and w/out- consumption w and w/out trade
- Implications of trade, or rather the structuring of economies for the facilitation of trade?
Interdependency, move towards protectionism
- Two agent economy
- Absolute adv: when an agent can carry on activity w less resources than another
- Comparative adv: agent has low OC – specialisation
o Price: between the 2 OCs
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Model simplified rep of reality- 2 productive activities + 2 indiv: when trading no transaction costs (negotiation/transportation) or other barriers (import quotas/tariffs) Economics: the study of choice in a world of unlimited wants and scarce resources. Ratio of production over input (hours)- amount of resources used to perform a productive activity determines productivity. Opportunity cost: value of next best alternative to taking a particular action. Amount of resources used to perform a productive activity determines productivity. Resources are scarce operate in a constrained environment (financial/time) Extreme intermediary ppc (rep all max output possibilities of resources with given set of inputs if inputs are used efficiently) Efficient production pt: rep combo of g for which currently available resources do not allow an increase in production of one g w/out reduction in the production of the other (pts on ppc rep efficient) vs. inefficient. Attainable production pt: rep any combo of g that can be produced w currently available resources vs. unattainable.
