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Economics Day 2.docx

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Wilfrid Laurier University
Olivia Ozlem Mesta

Economics Day 2 Lecture: Wednesday, September 19 Chapters 3-4 Chapter 3  Trade allows countries to produce along their ppf and consume outside of it by getting goods and services in return. This is more economically practical than self sufficiency  Therefore you cannot consume anymore than what you produce without trade  See diagram in notes  With trade countries are both capable of consuming beyond their PPF by focusing more time on specializing production of one good and trading for the other  This therefore will be seen as a point outside the PPF  Therefore it is economically more rational to participate in trade  Without trade a country’s PPF is also in CPF (consumption possibilities frontier)  Absolute Advantage- the ability to produce a good or service using fewer resources or inputs than another producer (labour, or supplies)  Comparative Advantage- the ability to produce a good at a lower opportunity cost than another producer  So to determine who has the comparative advantage we must analyze who has a lower opportunity cost which in the example in chapter 3 it is how much wheat we could have produced for one more computer  Because one computer requires 100 hours and a tonne of wheat requires 10 hours the opportunity cost of building one more computer is 10 tonnes of wheat in the US in chapter 3  Because one computer requires 125 hours and a tonne of wheat requires 25 hours of labour the opportunity cost in Japan is 5 tonnes of wheat in chapter 3  Therefore in this example US has absolute advantage of both goods but Japan has the comparative advantage in computers  If each country has a comparative advantage in one good than both countries benefit from the trade  Therefore as long as each country has a comparative advantage (lower opportunity cost trade is practical)  This increases the size of the economic pie  If Brazil can produce a pound of coffee in one hour and Argentina can produce coffee in 2 hours Brazil has the absolute advantage (fewer inputs)  If Brazil can produce a bottle of wine in 5 hours and Argentina can produce a bottle of wine in 4 hours, Argentina has the comparative advantage because in 4 hours they could produce 2 pounds of coffee whereas in 5 hours Brazil could produce 5 pounds (opportunity cost) Chapter 4  Market- a group of buyers and sellers of a particular good or service  competitive market- is one in which there are so many buyers and so many sellers that each has a negligible (none) impact on the market price (price takers)  Perfectly competitive market- all goods are exactly the same, buyers and sellers that no one can affect the market price- each is a price taker. Demand  Demand comes from the behaviour of buyers  Quantity Demanded-the amount of the good that buyers are willing and able to purchase  Law of Demand- price and quantity demanded have an inverse relationship as price increases quantity demanded falls  Demand Schedule- a table that shows the relationship between the price of a good and the quantity demanded  the more it costs the less you will purchase  Market Demand- the individual quantities demanded at each price of each better  Demand Curve Shifters o Number of buyers  An increase in the number of buyers causes the demand curve will shift to the right o Income  Demand for a normal good has a positive correlation with income could be luxuries or necessities  If income increases for a normal good the demand curve shifts to the right  Demand for an inferior good is negatively related to the income an example is buses or no-name products  An increase in income shifts the demand curve to the left o Prices of related goods  Two goods are substitutes if an increase in the price of one causes an increase in the demand for the other  Example coke and pepsi  Complement goods- an increase in the price of one leads to a fall in the demand for another  Example: computers and software- if computer price goes up less software will be sold o Consumer preferences  Anything that increases the popularity of a product increases the demand ex. Atkins diet o Consumer expectations  Expectations that affect the buying decisions of consumer  Ex: consumers expect a salary increase so they begin to purchase luxuries now Supply  Comes from the behaviour of the seller  Quantity Supplied- the amount sellers are willing and able to supply  Law of Supply- As price increases so does supply (direct relationship)  Supply schedule- a table that shows the relationship between price and quantity supplied  Market Supply- The quantity supplied in the market provided by the sum of quantities supplied by individual sellers  Supply curve shifters o Input prices  A fall in raw materials or wages will shift the supply curve to the right because a business has become more efficient o Technology  With the same result as lower input prices, a technological advancement will shift the supply curve to the right by making a business more efficient o Number of sellers  An increase in the number of sellers increases the quantity supplied and therefore will shift the curve to the right o Expectations  If a firm expects a raise in the selling price of their product in the near future they may withhold some of their inventory thus making the current market supply lower and in turn shifting the curve to the left o Natural events  A natural event such as a hurricane in Florida will ruin the orange crop thus shifting the curve to the left Supply and Demand Together  Equilibrium- price has reached the level where quantity supplied and quantity demanded are equal  Surplus- when the price is set above equilibrium and quantity supplied is higher than quantity demanded so price will subsequently fall until it reaches the equilibrium because as you lower the price the quantity demanded will increase  Shortage- when price is set below the equilibrium and quantity demanded is higher than quantity supplied so price will subsequently rise to equilibrium which will lower quantity demanded and bring the market back to equilibrium Economics Day 3 Lecture: Wednesday, September 26 Chapters 4-5 CHAPTER 4 Three Steps to Analyzing Equilibrium  Decide whether eve
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