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ECON 1011 Lecture Notes - Lecture 3: Comparative Advantage, Opportunity Cost, W. M. Keck Observatory

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GWU
Department
Economics
Course
ECON 1011
Professor
Daniel MacKay

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ECON 1011 Lecture Notes - Lecture 2: Absolute Advantage, Opportunity Cost, Comparative Advantage

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ECON 1011 Lecture Notes - Lecture 3: Comparative Advantage, Opportunity Cost, W. M. Keck Observatory

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ECON 1011 Lecture Notes - Lecture 4: Demand Curve, Gotland Regiment

Document Summary

Advantage: answer: time- time is a valuable resource, as the common phrase goes time is money . By hiring a lower employee, this allows for our agent in this situation to spend their time doing other things that. Specialization of labor allows for agents to be produce more goods in more efficient, and in some situations, produce more goods in less less time than their competition (lower opportunity cost) How much of one good is sacrificed by producing another (what is the trade-off?) Gains of trade time: example: john can pick apples at 10 apples an hour. Irene, who can only pick 5 apples an hour. While john"s apple company now only has an efficiency of 5 apples an hour, john"s free time can now be used to better manage the company and hire two more employees. Ppf for production of goods x and y .

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Related Questions

I am working on this question related to chapter 3 in Mankiw's Microeconomics book. I am having a tough time grasping the process of economics. So I'm listing the question and would like someone to describe the process to calculate this question.

1. Gary and Diane must prepare a presentation. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculations and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides.

a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally?  My inclination is to divide the amount of time each can do and find the average? So it would take them 11 hours for the calculations and 15 hours to produce the slides?? Is this the correct thought process?

b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? Here - does Diane have the lower opportunity cost as she is realizing less time to complete the project because it takes less time for Gary to produce calculations and slides? So she has a comparative advantage?

c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides? The only other solution I can apply here is: Gary is quicker at both calculating and preparing slides, but Diane is only slightly slower in preparing calculations but much longer at preparing slides - so give the slides to Gary and the calculations to Diane? How do I present this?

The opportunity cost of one more slice of pizza in terms of sodas is the

   

the total number of pizza slices that we have divided by the total number of sodas that we have.
   

the number of sodas we have to give up to get one extra pizza slice.
   

the number of pizza slices we have to give up to get one extra soda.
   

the total number of sodas that we have divided by the total number of pizza slices that we have.

1 point

QUESTION 2

A production possibilities frontier shows

   

how money can be allocated among two kinds of goods.
   

the limits to the future growth of a nation.
   

the various combinations of output a nation can produce at a certain time, given its available resources and technology.
   

that if the price of one good decreases, the price of the other has to increase.

1 point

QUESTION 3

When a production possibilities frontier is bowed outward, as more of one good is produced, its opportunity cost

   

remains constant.
   

might increase, decrease, or remain constant depending on how much people value the additional units of the good.
   

increases.
   

decreases.

1 point

QUESTION 4

When all of the available factors of production are being efficiently employed, the

   

the economy is producing at a point within its PPF.
   

PPF disappears.
   

the economy is producing at a point beyond its PPF.
   

the economy is producing at a point on its PPF.

1 point

QUESTION 5

If a nation devotes a larger share of its current production to consumer goods, then

   

its PPF will shift inward.
   

its economic growth will slow down.
   

its PPF will shift outward.
   

some productive factors will become unemployed.

1 point

QUESTION 6

A point on the production possibilities frontier reflects an

   

the attainable point with full employment of all resources.
   

attainable point without full employment of all resources.
   

unattainable point without full employment of all resources.
   

the unattainable point with full employment of all resources.

1 point

QUESTION 7

When drawing a production possibilities frontier, which of the following is held constant?

   

the available factors of production and the state of technology
   

the amount of money in the economy
   

the prices of goods and services
   

the quantity of the goods and services that are produced

1 point

QUESTION 8

As we move along the production possibilities frontier,

   

more of both goods can be produced.
   

the possibilities of tradeoffs diminish.
   

a tradeoff is not possible because nations need all goods.
   

the production of one good increases as the production of the other good decreases.

1 point

QUESTION 9

Which of the following is an assumption used when drawing a production possibilities frontier?

i.Human wants and desires are limited to what is available.

ii. Only two goods are considered.

iii. The level of technology is fixed and unchanging.

   

I and iii
   

ii only
   

I, ii, and iii
   

I only

1 point

QUESTION 10

To achieve gains from trade, a country

   

needs to have an absolute advantage in the production of all goods.
   

specializes in producing a good in which it has a lower opportunity cost.
   

must produce at a point beyond its PPF.
   

should produce at the midpoint of its PPF.

1 point

QUESTION 11

Relative to Al, Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.

   

a comparative advantage
   

more production efficiency
   

a marginal benefit
   

a comparative benefit

1 point

QUESTION 12

Does economic growth depend upon which of the following?

i.Improving the quality of labor

ii. Technological advancement

iii. Increasing the amount of capital

   

iii only
   

ii only
   

I only
   

I, ii, and iii

1 point

QUESTION 13

In one hour John can produce 20 loaves of bread or 18 cakes. In one hour Phyllis can produce 30 loaves of bread or 15 cakes. Which of the following statements is true?

   

John has a comparative advantage in producing cakes.
   

Phyllis has an absolute advantage in both goods.
   

Phyllis has a comparative advantage in producing cakes.
   

John has an absolute advantage in both goods.

1 point

QUESTION 14

As an economy produces more of one of the goods on a bowed out production possibilities frontier, what happens to the opportunity cost of producing the good?

   

It decreases.
   

It might increase, decrease, or remain constant depending on how much people value the additional units of the good.
   

It remains constant.
   

It increases.

1 point

QUESTION 15

The production possibilities frontier illustrates the

   

goods and services that people want.
   

maximum combinations of goods and services that can be produced.
   

resources the economy possesses, but not it is the level of technology.
   

limits to people's wants.

1 point

QUESTION 16

The United States produced approximately ________ worth of goods and services in 2007.

   

$14 billion
   

$14 trillion
   

$140 billion
   

$140 trillion

1 point

QUESTION 17

The fact of increasing opportunity cost when moving on the PPF means that

   

to increase the production of one product requires smaller and smaller sacrifices of the other good.
   

to decrease the production of one product requires smaller and smaller sacrifices of the other good.
   

to increase the production of one product requires larger and larger sacrifices of the other good.
   

when the government forces a movement from one point on the PPF to another point, no production is lost.

1 point

QUESTION 18

Other things equal, if India devotes more resources to educate its population than China,

   

China will grow faster than India.
   

India will be able to eliminate scarcity faster than China.
   

India will be able to eliminate opportunity cost faster than China.
   

India will grow faster than China.

1 point

QUESTION 19

For Ireland to grow more potatoes, wool production must decrease. This situation is an example of

   

zero opportunity cost.
   

producing at a point that lies beyond the PPF.
   

opportunity benefit.
   

a tradeoff.

1 point

QUESTION 20

Moving from one point to another on a production possibilities frontier implies

   

increasing the production of both goods.
   

increasing the production of one good and decreasing the production of another.
   

holding the production levels of both goods constant.
   

decreasing the production of both goods.

1 point

QUESTION 21

The United States is one of the richest nations in the world,

   

but it can still benefit from specialization and trade.
   

so does not need to trade with poor nations to achieve any gains from trade.
   

so might not have a comparative advantage in producing any goods.
   

so it must have a comparative advantage in the production of all goods.

1 point

QUESTION 22

"Comparative advantage" is defined as a situation in which one person can produce

   

more of all goods than another person.
   

a good for a lower opportunity cost than another person.
   

a good for a lower dollar cost than another person.
   

more of a good than another person.

1 point

QUESTION 23

The idea of increasing opportunity cost is reflected in the

   

the linear shape of the production possibilities frontier.
   

bowed in the shape of the production possibilities frontier.
   

bowed out the shape of the production possibilities frontier.
   

the positive slope of the production possibilities frontier.

1 point

QUESTION 24

Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country?

i)It enjoys gains from trade.

ii)It must have an absolute advantage in the production of the good it produces.

iii)It is producing at a point beyond its PPF.

   

I only.
   

I and ii.
   

I and iii.
   

ii and iii.

1 point

QUESTION 25

If society moves from a period of time with significant unemployment to a time with full employment, its production possibilities frontier will

   

shift rightward.
   

not shift because the society moves from one point on the frontier to a point inside the frontier.
   

not shift because the society moves from a point inside the frontier to a point on the frontier.
   

shift leftward.

1 point

Market Analysis Market Participants Market participants act as if they are rational, self-interested, and forward-looking. For example, financial managers try to maximize the present value of profits for their particular companies, rather than ignore future values. Companies pursue many goals, but it is a financial mistake for managers to pursue any goal that conflicts with the primary goal of maximizing their firm's profits. Decentralized decision making by individual market participants is more economically efficient that centralized decision making by government policymakers. For example, it is more economically efficient to have financial managers obtain financing for their particular companies than to have government obtain it. A high degree of competition among market participants is the most economically efficient disciplining mechanism. For example, highly competitive financial markets discipline financial managers to pay fair market interest rates on the debt securities issued by their particular companies. The market system of prices is the most economically efficient allocative mechanism. For example, it is more economically efficient to distribute a firm's corporate stock to those buyers who are willing and able to pay the market price of the stock than to have the government distribute the stock. It is economically efficient for market participants to buy low and sell high globally. For example, it is economically efficient for U.S. firms to sell their financial securities to the highest bidders, no matter where they live in the world economy. Market imperfections can create considerable risk to market participants. For example, because of market imperfections, firms operating in the international financial markets encounter foreign exchange rate risk, political risk, interest rate risk, and default risk. Consumer Sovereignty The principle of consumer sovereignty tells us that by making their dollar votes, consumers indirectly determine the quantity and quality of products that firms will produce. For example, it is not economically efficient for financial managers to obtain more financing for their particular firms than is needed for their firms to produce the profit-maximizing level of output demanded by consumers. Market Economy A highly competitive market economy is largely self-regulating, in the absence of substantial market imperfections, in that economic conditions cannot be substantially improved by government regulation or other types of government intervention beyond laissez-faire policies. For example, if a firm's corporate stock is overvalued by a market economy, market forces will tend to drive down the value of the stock to a market price at which it is neither overvalued nor undervalued. As if by an invisible hand, highly competitive market forces will tend to create a harmony of interests among individual market participants, in the absence of substantial market imperfections. Consequently, the interests of shareholders and other stakeholders are compatible. For example, in trying to maximize profits, firms produce employment, income, consumer products, and wealth for households, as well as tax revenue for government, which helps maximize consumer utility and maximize social welfare. In a market economy, resources, products, and assets flow to their highest valued uses among alternative uses. For example, the shares of firms' corporate stocks will be acquired by those market participants who most highly value them, as indicated by the fact that they are willing to pay the most to acquire them. The efficient economic role of government is limited to Laissez-Faire ("hands off") policies, which create very little intervention in a market economy. For example, government regulations of banking and securities industries to maintain healthy, reasonably profitable, consumer-oriented financial markets would not be needed in a highly competitive market economy in the absence of substantial market imperfections. In a market economy, it is economically efficient for each market participant to specialize according to comparative advantage in producing what they can produce relatively better than other market participants, rather than produce all the outputs they can produce absolutely better than others. For example, it is economically efficient for people who are relatively better at being financial managers than others, to specialize in financial management even if they are absolutely better than others in doing many other types of work. If all labor were allocated to its comparative advantage, then no possible reallocation of labor would exist that could increase the rate of return to labor (i.e., the wage). There is no such thing as a free lunch, because all resources, products, and assets in a market economy are scarce. For example, current federal government budget deficits are not free to current market participants in that the deficits must be financed by future tax increases and/or future decreases in government spending and/or future inflation. For additional information on the Market Economy click here. Marks, R. E. (2006, December). There Is No Such Thing As Free Lunch. Australian Journal of Management. 31(2). 1-7. Financial Decisions An efficient financial decision, practice, transaction, or condition is one that is optimal -- meaning best; it cannot be improved, from society's perspective. If there is some profitable way to improve some business practice that would benefit society, that practice is somewhat inefficient. Any change in a financial decision, practice, transaction, or condition that improves society is an efficiency improvement. For example, it is an efficiency improvement for a business to cut production costs by reducing waste (e.g., by reducing spending on unprofitable activity. A financial decision, practice, transaction, or condition is fair-- meaning just or equitable, if the financial benefits are distributed to those involved in proportion to how much they each voluntarily contributed to produce those benefits. For example, a financial practice that discriminates against some people on the basis of race, age, gender, nationality, or religion is unfair. For example, an unethical business practice is unfair. For additional information relating to Market Analysis and fair financial decisions, click on the following: Teaching Ethical Economic Practices to Business Managers. Johnston, C. (2009, October). The Proceedings of the Annual Conference of The International Academy of Business and Economics. Fairness is a necessary condition, but not a sufficient condition, for efficiency. All efficient financial practices are fair, but some fair practices may still fail to be efficient. For example, embezzling company funds is an unfair and inefficient, criminal financial activity. As another example, an ethical business practice that could be improved is fair but not efficient. Opportunity Cost Principle Opportunity cost principle: The efficient measure of the cost of any allocation of resources, products, money income, wealth, or time is its opportunity cost -- the value of the next best use. The opportunity cost of how one uses his or her resources is the value of the highest valued alternative use. The opportunity cost of one investment is the expected return on the next best investment available to the firm. For example, the opportunity cost of a firm using some of its profits to pay dividends to its stockholders would be the present value of future income those profits could have earned if invested in the firm's highest valued investment project.

Discussion Questions These questions stem from the Class Discussion Questions you will be anwering in the Discussion Board. Think about the questions and how they relate to the financial management principles above.

2. Applications: State the financial management principle that appears to be violated in each of the following cases and explain how it is violated:

(a) A corporation is maximizing sales growth and the price of its corporate stock is falling.

(b) A highly paid financial manager in the auto industry quit his job to set up his own small auto repair shop, which is expected to incur a loss for the first three years then earn normal profits.