ECON 010 Lecture Notes - Lecture 1: Aerial Work Platform, Absolute Advantage, Opportunity Cost
09.03.2014
Opportunity cost: cost of the best foregone alternative
- Resources scarce
- Cost of going to college: direct out of pocket cost ~60K
o Labor market salary sacrificed ~36k= opportunity cost
PPF: Production possibilities frontier
- Bowed out
- Inside PPF, feasible but inefficient
- Outside PPF, infeasible with current technology
- Can consume outside PPF with trade, technology
- Along PPF, efficient=best outcome, desirable
- EX: Neighbor: Apples: 30; Cherries: 60. Linear. Efficient: 9 Apples and 42
Cherries
You: Apples, 20; Cherries:20. Linear. Efficient: 8 Apples and 12 Cherries
Absolute advantage vs Comparative advantage
- Ex: Neighbor: For 1 apple, sacrifices 2 cherries. You: For 1 apple, you sacrifice
1 cherry.
o You have a CA in Apples (lower cost) and neighbor in Cherries
o You should focus (specialize) on Apples and neighbor on Cherries
- Both can trade and benefit: reach outside original PPF
- Specialize: Neighbor: 60 cherries; You: 20 Apples
- Trade: Neighbor: 42 Cherries, sends 18 to you; You: Keep 8 Apples, sends 12
Apples
- After Trade: Neighbor: 12 Apples, 42 Cherries; You: 8 Apples, 18 Cherries
Terms of Trade: conditions of exchange
- Trade benefits both parties but not all trade benefits all parties
- EX: You: CA in apples; think trading in terms of Apples; if you give up 1 Apple,
you’ll get 1 cherry at home. Trade: only if 1 Apple gets you >1 Cherries
Neighbor: CA in Cherries; think trading in terms of Cherries; if neighbor gives
up 1 Cherry, he can get ½ apple. Trade: only if 1 Cherry get you > ½ apple
- Is 12 Apples → 18 cherries beneficial? Yes.
- Terms of trade: 1 Cherries gets [1/2 Apple, 1 apple]
EX: Joint PPF: 50 Apples; 80 Cherries
- In this joint economy, neighbor should pick cherries until maximum
(60 cherries) since he is the low cost cherry picker (higher skill). This
gives up 30 Apples. (20 Apples, 60 Cherries). Slope parallel to that of
just neighbor’s PPF
- Slope is much steeper once you want to pick 61 cherries. Slope
parallel to that of your PPF
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Opportunity cost: cost of the best foregone alternative. Cost of going to college: direct out of pocket cost ~60k: labor market salary sacrificed ~36k= opportunity cost. Can consume outside ppf with trade, technology. Ex: neighbor: for 1 apple, sacrifices 2 cherries. 1 cherry: you have a ca in apples (lower cost) and neighbor in cherries, you should focus (specialize) on apples and neighbor on cherries. Both can trade and benefit: reach outside original ppf. Specialize: neighbor: 60 cherries; you: 20 apples. Trade: neighbor: 42 cherries, sends 18 to you; you: keep 8 apples, sends 12. After trade: neighbor: 12 apples, 42 cherries; you: 8 apples, 18 cherries. Trade benefits both parties but not all trade benefits all parties. Ex: you: ca in apples; think trading in terms of apples; if you give up 1 apple, you"ll get 1 cherry at home. Trade: only if 1 apple gets you >1 cherries.
