ECN 001A Study Guide - Fall 2019, Comprehensive Midterm Notes - Test Cricket, Economic Equilibrium, Demand Curve

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Published on 14 Feb 2019
School
UC-Davis
Department
Economics
Course
ECN 001A
Professor
ECN 001A
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5
Discussion 1
Opportunity Cost
It refers to what you give up in order to do/produce something else
Absolute Advantage
Having more number of goods produced by a nation / person / company
Specialization
Producing the goods that they are having the advantage (either absolute advantage or comparative advantage)
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6
Comparative Advantage and Price of the Trade
Having lesser opportunity cost in producing certain goods compared to others
Number of Pizza
Produced
Number of Sandwich
Produced
Opportunity Cost
for Pizza
Opportunity Cost
for Sandwich
Stephen
3
1
1/3 sandwich
3 pizza
Anastasia
4
2
1/2 sandwich
2 pizza
From the above example. Anastasia is having the absolute advantage in both pizza and sandwich, since she is
producing more number of goods in both fields as compared to Stephen
However, as we compared the opportunity cost of producing pizza, Stephen has less opportunity cost of
producing pizza as compared to Anastasia (1/3 < 1/2), so we can say that Stephen is having the comparative
advantage in producing pizza
As we compared the opportunity cost of producing sandwich, Anastasia has less opportunity cost of producing
sandwich as compared to Stephen (2 < 3), so we can say that Anastasia is having the comparative advantage in
producing sandwich
So, trade will occur, with Stephen is trading his pizza for Anastasia’s sandwich
Time Taken to produce
1 Burrito
Time taken to produce
1 Lasagna
James
1 hour
5 hour
Ricardo
2 hour
4 hour
Burrito Produced
in … hours
Lasagna Produced
in … hours
Opportunity
Cost for
Burrito
Opportunity
Cost for
Lasagna
5
1
1/5 lasagna
5 burrito
2
1
1/2 lasagna
2 burrito
Burrito
Lasagna
Maximum Price
1/2 lasagna
5 burrito
Minimum Price
1/5 lasagna
2 burrito
From the above tables, we can say that James is having both absolute advantage as well as comparative
advantage in producing burrito, and Ricardo is having absolute advantage as well as comparative advantage in
producing lasagna
So, trade will occur, with James is trading his Burrito in exchange for Ricardo’s lasagna
The maximum and minimum price of trade is determined by the opportunity costs in producing the 2 items
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12
Discussion 2
Substitutes
It is the goods whose demand increases when other good’s price increases
It is the goods that is usually rival to each other (like Pepsi and Coke)
Complements
It is the good whose demand decreases when the price of other goods increases
It is normally the goods that is consumed together
Price Elasticities of Demand
  




It is the measure of the change of quantity demanded when the price is changed
The demand is elastic if the percentage change of quantity demanded is more than the percentage change of
price
Elastic goods typically has a lot of substitutes (like Coke and Pepsi)
The demand is inelastic if the percentage change of quantity demanded is less than the percentage change of
price
Inelastic goods typically is a necessity (like medication)
When you decrease the price of the elastic goods, it is compensated by the huge increase in the quantity
demanded, so when you drop the price, there will be an increase in revenue
When you decrease the price of inelastic goods, there is a small increase in the quantity demanded, so there will
not be an increase in revenue
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