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Lecture 002 (September 16th, 2013).docx

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Avi Cohen

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Positive Versus Normative Claims (CH 5.5) Positive (or empirical) statements are about what it is: It can be evaluated as true or false by checking facts. Normative statements are about what you believe should be; involve value judgements. And it cannot be evaluated as true or false by checking the facts For any policy, always weigh benefits against opportunity cost. Economists are not good with normative statements. Policy Question. Should the government pay for universal flu shot? What is the opportunity cost of spending 80 million dollar in vaccinating all Ontario citizens? Opportunity cost and comparative advantage are key to understanding why specializing and trading makes us all better off. Gains from Trade With voluntary trade, each person feels what they get is better than what they give up. Opportunity cost equals what you give up divided by what you get. Production Possibilities Frontier: a graph showing the maximum combinations of products Jacqueline's Production Frontier The dot inside the line means that she's not maximizing efficiency, outside the line is unattainable with the current technology. The opportunity cost of making 20 more wood is 10 loafs of bread. This is the interest of the slope. Rise over run. Opportunity cost is calculable just with the slope. The slope of this line is 2 (50 over 100). Opportunity Cost equals give up over get. And Samantha has to give up 10 loaf of bread to take 5 cords of wood. If there is a trade, is this a mutually benefiting deal? Is this a win win situation? Opportunity Cost for Jacqueline & Samantha Refer to Figure 1.3 Jacqueline has a comparative advantage in wood making and Samantha, loaf of bread. What ratio do you trade wood with bread (trade lines)? They can trade with the ratio of 1 to 1. What shows the ratio of 1 to 1 along the trade lines is that the
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