ECON 0100 Lecture Notes - Lecture 1: Comparative Advantage, Opportunity Cost

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5 Jun 2018

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Chapter 1

Economics

Microeconomics studies how people and firms make decisions and how they

interact.

○

Examples of Microeconomics topics & questions

Should someone go to college or apply for a full-time job?

How can we design an organ donation policy to increase donations?

How many workers a firm should hire?

Many apartments to choose from, which do you chose from.

How a company should cut costs?

○

•

Principle 1: Scarcity Necessitates Choice

A resource is anything that can be used to produce something else.

○

Resources are scarce.

Not enough of the resources are available to satisfy all the various ways a

society wants to use them.

Not enough resources to what they need.

○

Examples of scarce resources:

Time

Food

Land

Natural resources

○

Because resources are scarce, we cannot use them for everything we want. This

means we are forced to choose how to allocate resources.

Level of Society:

Sum of Individual Decisions

How market economy works

□

Community-Wide Level

When sum of individual decisions

□

Doesn’t work well

□

•

Principle 2: The true cost of something is its Opportunity Cost

Real-Life Case: Rita's FREE Italian Ice

○

Why someone may decide not to use the opportunity?

Other way you can spend your time

○

Opportunity Cost (O.C.)

Cost of the next best alternative

i.e. what someone needs to give up

□

You can spend your time better than standing in line

○

EXAMPLE

Alice is deciding between staying 2 extra hours at work where she would earn

$30 in overtime OR going to the movie theatre next door and spending $10 to

watch a movie. In both cases, Alice expects to spend $5 on parking. What is

Alice's opportunity cost of going to see that movie?

Solution

$30 +$10 = $40

□

○

•

Principle 3: "How much" is a decision at the margin

"How much" decisions require making trade-offs at the margin.

Comparing the cost and benefits of doing a little bit more of an activity versus

doing a little bit less.

○

Ex. of "how much" decisions:

Should I eat another cookie?

How much schooling do you want to do?

Do I want to increase my stocks?

○

Ex. of NOT "how much" decisions:

What major should I get?

Do I want to get a car or not?

Do I want to buy stocks?

○

•

Principle 4: People usually respond to incentives

Example of incentives seen in daily life:

HW points

Threat of punishment (negative incentive)

BOGO sale

Money

○

Sometimes, if the wrong incentives are used, we can get undesirable outcomes.

○

EXAMPLE

In the 19th century, Hanoi was overrun by rats. To combat the rat population,

the government offered a bounty on rats. As a result, the rat population

actually increased! What do you thing went wrong here?

Answer: People bred rats to turn them in to get more money.

○

•

Principle 5: There are gains from trade

When individual specialize in tasks that they are good at and then trade, they can

get more compared to the case when everyone is self-sufficient.

○

EXAMPLE

Doctors can specialize on providing medical help and farmers can specialize

on growing fruits and vegetables.

○

Works as long as the market exists.

○

•

Principle 6: Markets move towards equilibrium

In this class, when we discuss equilibrium we mean a situation where no individual

would be better off changing his or her behavior or choices.

○

Markets move towards equilibrium because people respond to incentives for their

own well being.

○

EXAMPLE

Gas prices at nearby gas stations are usually the same

○

•

Chapter 2

Production Possibilities & Trade

A model is like a road map.

Both provide simplified versions of what they are describing only including

relevant details.

Captures key factors.

○

Models will likely not be perfect representations of the environment being studied,

but they will contain the key components economists wish to study.

○

•

Model #1: Production Possibilities Frontier (PPF)

Scarce resources mean people, companies, and economies face trade-offs.

○

The country of Lilliput.

Small island w/ 3 million people.

Two jobs: farming for food or producing wine.

2 million tons of food per 1 million workers

□

1 million cases of wine per 1 million workers

□

○

Draw the PPF for Lilliput.

○

•

Draw points on graph:

Point A: 1 million workers make food, 2 million people make wine.

Point B: 2 million tons of food, 1 million cases of wine

Point C: 4 million tons of food, 1 million cases of wine

Point D: 6 million tons of food, 2 million cases of wine

○

Economy is EFFICIENT if it cannot increase production of one good without

decreasing production of the other.

○

Can Lilliput increase wine or food production without decreasing production of the

other?

Point A is: efficient.

All points on the PPF are: possible, efficient

All points inside (to the left of) the PPF are: possible, but not efficient

All points outside (to the right of) the PPF are: not possible (without trade)

○

Economic Growth

There has been an increase in ability to produce goods and services.

The PPF can illustrate this.

Two Sources of Economic Growth:

Technology

□

Factors of Production

□

○

Calculating Opportunity Cost

Give Up / Get

○

The O.C. of going from 10 to 15 computers is ______.

The O.C. of going from 15 to 20 computers is ______.

This is an example of INCREASING OPPORTUNITY COST.

Parabola that is upside down, O.C. is increasing.

□

Model #2: Comparative Advantage & Gains from Trade

•

Without trade, let's assume Lilliput chooses to produce 2 food and 2 wine. Atlantis

chooses to produce 3 food and 5 wine. Mark these points on your graph.

○

Absolute Advantage in food -- Who can produce more food? Atlantis

○

Comparative advantage in food -- Who has smaller O.C. in food? Lilliput

○

When determining who should specialize in the production of what, it is

comparative advantage that ultimately matters.

For each case of wine Lilliput produces, it must give up ____ ton(s) of food. For

each case of wine Atlantis produces, it must give up ____ ton(s) of food.

Thus, ___________ has the lower opportunity cost of producing wine &

thus also has the comparative advantage.

□

For each ton of food Lilliput produces, it must give up ____ cases(s) of wine.

For each ton of food Atlantis produces, it must give up ____ cases(s) of wine.

Thus, ___________ has the lower opportunity cost of producing food &

thus also has the comparative advantage.

□

○

Using what we have learned, ____________ should specialize in producing food and

will make __________________ tons of food. ____________ should specialize in

producing wine and will make __________________ cases of wine.

○

Determining Trade

A country will agree to trade so long as the terms of after specialization.

Given this, one acceptable trade agreement between Lilliput & Atlantis is:

Atlantis: min accept for wine is _____ food.

□

Lilliput: most pay for wine is ______ food.

□

Thus, the price could be anything between ____ and ____ food per wine.

○

Through specialization & trade, countries/individuals are able to produce and

consume more than if they were self-sufficient.

○

PRACTICE PROBLEM

•

Ex. 1

Suppose Lilliput's population doubles after

the publication of the book Gulliver's Travels.

Draw both the original PPF & the PPF after

the population increase.

▪

○

Ex. 2

Suppose Lilliput develops a new technology

that allows each worker to produce twice as

much wine. Draw both the original PF and the

new PPF after the technological

advancement.

▪

○

Opportunity Cost w/ PPF

Redraw PPF.

▪

What happens to food production when wine

production is increased from 0 to 1 million?

6 million tons --> 4 million tons

▪

How about 1 million to 2 million?

4 million tons --> 2 million tons.

▪

At all the quantities of production on the PPF,

the O.C. of 1 case of wine in terms of tons in

food is:

2 tons of food.

▪

Lilliput is an example of CONSTANT

OPPORTUNITY COST.

▪

○

Hypothetical Economy that produced computers &

wheat.

Producing the first five computers require

giving up ___ bushels of wheat.

O.C. = ______

□

▪

Going from 5 to 10 computers requires giving

up ___ bushels of wheat.

O.C. of next 5 computers is = _____

□

▪

○

The most wine Lilliput can produce is ____.

The most wine Atlantis can produce is ____.

The most food Lilliput can produce is ____.

The most foodAtlantis can produce is ____.

Alice

Bob

Clothes

Shoes

Clothes

Shoes

○

Plot the PPF for Alice & the PPF for Bob.

○

Who has a comparative advantage in the

production of shoes?

Bob

○

Who has a comparative advantage in the

production of clothes?

Alice

○

What ranges of trades would be acceptable to

both Alice and Bob?

○

Lecture 1

Monday,*May*14,*2018

9:59*AM

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Document Summary

Microeconomics studies how people and firms make decisions and how they interact. Many apartments to choose from, which do you chose from. A resource is anything that can be used to produce something else. Not enough of the resources are available to satisfy all the various ways a society wants to use them. Because resources are scarce, we cannot use them for everything we want. This means we are forced to choose how to allocate resources. Principle 2: the true cost of something is its opportunity cost. Cost of the next best alternative i. e. what someone needs to give up. You can spend your time better than standing in line. Alice is deciding between staying 2 extra hours at work where she would earn. in overtime or going to the movie theatre next door and spending to watch a movie. In both cases, alice expects to spend on parking.

Related Questions

PART B â Questions 10 â 27 Use the following assumptions to answer all questions: â¢ There are three countries â Argentina, Britain and Canada. â¢ Each country produces and consumes two kinds of goods â crude oil and beef. â¢ All countries make their goods from a single type of input â labor â and each country has 700 hours of labor available to produce crude oil and beef. â¢ Each country demands 5 (five) barrels of crude oil. This assumption simply means that a country must have exactly 5 barrels of crude oil â it may produce them domestically, it may import them from abroad, or it makes some domestically and imports the rest. â¢ Countries produce goods using the technology described in the table below Technology Hours of labor needed to produce one unit of good Using the above assumptions, answer the following questions: â¢ Calculate the quantities of crude oil and beef produced in each country in autarky (when they do not trade and each country produces its own crude oil and beef) â¢ Order the countries according to their absolute advantage in production of crude oil â¢ Order the countries according to their absolute advantage in production of beef â¢ Consider the case where countries are free to specialize and trade. In the table below calculate each countryâs opportunity cost of producing one unit of each good. â¢ Calculate the quantities of crude oil and beef produced in each country, consistent with the countryâs comparative advantage. Based on the above calculations, answer questions 10 through 27: Consider autarky, when countries do not trade and each country produces its own crude oil and beef. 10. In autarky, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 11. In autarky, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 12. In autarky, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 13. In autarky, Argentina produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 14. In autarky, Britain produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 15. In autarky, Canada produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 16. Country of _____ has absolute advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 17. Country of _____ has absolute advantage in production of beef. a. Argentina b. Britain c. Canada d. No country Consider effects of specialization, when countries are allowed to trade. 18. When countries specialize, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 19. When countries specialize, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 20. When countries specialize, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 21. When countries specialize, Argentina produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 22. When countries specialize, Britain produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 23. When countries specialize, Canada produces ____ pounds of beef. a. 0 b. 700 c. 150 d. 400 24. Country of __C___ has comparative advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 25. Country of ___A__ has comparative advantage in production of beef. a. Argentina b. Britain c. Canada d. No country 26. Countries gain from trade because specialization increases ____. a. Trade deficit b. Unemployment c. Efficiency d. Inflation 27. Countries should trade with trading partners that _____. a. Are equally technologically advanced b. Use superior technology in every industry c. Use less advanced technology in every industry d. Use different technologies, because trade benefits all

champagnebee680

For which of the following nations does international trade account for the largest percentage of GDP?
A) Japan
B) The Netherlands
C) Germany
D) Great Britain
E) the United States

2. Suppose that workers in Transylvania can produce only two goods-- yo-yos or sweat socks. The Transylvanian currency is the dealer. In what unit is the opportunity cost of yo-yos measured?
A) dealers
B) dealers per yo-yo
C) dealers per sweat sock
D) yo-yos
E) sweat socks

3. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany can produce one watch for every100 pounds of cheese it produces. Which of the following is true with regard to opportunity costs in the two countries?
A) The opportunity cost of producing watches is lower in Denmark.
B) The opportunity cost of producing cheese is lower in Denmark.
C) The opportunity cost of producing watches is identical in both countries.
D) It is impossible to compare opportunity costs because the two countries use different currencies.
E) In Germany the opportunity cost of producing one pound of cheese is one watch.

4. For each bow the Romans are producing, they give up the opportunity to make 10 arrows. The Dacians are giving up producing2 bows for every 40 arrows they are producing. Which of the following is true regarding comparative advantage?
A) The Romans have a comparative advantage in producing arrows
B) The Romans have a comparative advantage in producing bows
C) The Romans have a comparative advantage in producing arrows and bows
D) The Dacians have a comparative advantage in producing arrows and bows
E) The Dacians have a comparative advantage in producing bows

5. Which of the following is not a basis for trade between two nations?
A) different skill levels of the labor forces
B) one nation's absolute advantage
C) a difference in tastes between countries
D) economies of scale
E) different capital stocks

6. The opportunity cost of producing one car in Germany is 2,000bushels of wheat, and the opportunity cost of producing one car in Canada is 1,200 bushels of wheat. The two countries can realize mutual gains from trade if they agree on terms of trade that are
A) greater than 2,000 bushels of wheat per car
B) less than 1,200 bushels of wheat per car
C) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces wheat
D) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces cars
E) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and each country produces both goods

7. The rate at which two countries trade one good for another
A) is known as the foreign exchange rate
B) is known as the terms of trade
C) is known as the export line
D) equals the slope of the import line
E) equals the common slope of the countries' production possibilities frontiers

8. Which of the following is true?
A) International trade makes it possible for a country's consumption possibilities to exceed its production possibilities.
B) International trade requires that a country's production possibilities exceed its consumption possibilities.
C) A country's production possibilities always equal its consumption possibilities.
D) A country's consumption possibilities can never equal its production possibilities because of leakages in the system.
E) As long as there is full employment of resources, a country's production possibilities will exceed its consumption possibilities even with trade.

9. Which of the following is not a reason for international specialization?
A) some countries have educated, trained workers, while other countries have unskilled workers
B) tastes and preferences tend to be different in different countries
C) economies of scale can allow larger, specialized producers to operate at a lower average cost
D) mineral resources are often concentrated in particular countries
E) the world price of a good is determined by the world supply and demand for it

10. Ad valorem tariffs on imports are based on a percentage of an import's value; specific tariffs are based on a lump sum per physical unit imported.
A) True
B) False

raspberrychimpanzee903

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

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ECON 0100 Lecture Notes - Lecture 1: Comparative Advantage, Opportunity Cost

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