10/04/2016 Econ 200, Autumn 2016 Lecture 2 0. Log in to Learning Catalytics (session id:21030569) 1. Administrative Details 2. PPFs and Production 3. Comparative Advantage and Gains from Trade 1
Administrative Issues Karen from Pearson will be in Savery 305 on Thursday from 1:30-3:00 to address remaining issues with MEL/LC. Homework 1 due date extended due to a small number of people being locked out of myeconlab. Assignment due Wednesday at 11:59 pm. Homework 2 is now available and due Monday night. Don t forget that you get two chances for each problem ( Similar Question ). I will drop an additional class participation score (5 total) due to the addition of pop quizzes in quiz section (there will be three total). These dropped scores take the place of any makeups you may need for missed classes. 2
Article Response Assignment Three article responses will be due over the course of the quarter on the following dates: October 28 Nov 18 Dec 2 All are due at 11:59 pm on these dates Submission through Canvas only Please start looking for articles related to the topics we are covering. They should be recent articles, published after September 1, 2016. 3
Article Response Assignment 4 From the syllabus: You must describe, in your own words, the issues presented in the article, and then summarize how the material taught in class explains the information, events, or phenomenon in the article. This economic explanation must relate to a theoretical graph (one with some sort of equilibrium, like Supply and Demand, the PPF, etc). The graph must be drawn and included in your response.
Article Response Assignment Start looking for your article now! Must be published in an actual newspaper (or online version), not an opinion piece, relevant to the topics covered until October 28, and published after Sep 1, 2016. Places to look for news articles online: -Lexis Nexis -Proquest -Newsbank (All links can be found here: http://guides.lib.washington.edu/news/enews) Note: No blog posts, Wikipedia or other encyclopedia entries 5
Production Possibilities Frontier 6 Imagine you are in charge of an entire economy. What should you consider when deciding how much of each type of good and service to produce (e.g. how many guns and how much butter?) (Is this how our economy is designed?)
Production Possibilities Frontier 7 Chapter 2, Section1 Households, firms and governments continually face decisions about how best to use their scarce resources. Scarcity requires trade-offs. Economics teaches us tools to help make good trade-offs. A production possibilities frontier (PPF) is a curve showing the maximum attainable combinations of two products that may be purchases with available resources and current technology.
A Production Possibilities Frontier for Tesla 8 Tesla can produce sedans and/or SUVs. Points on the PPF are attainable for Tesla. Points below the curve are inefficient. Points above the curve are unattainable with current resources. Tesla s production possibilities frontier
Tesla Can Trade Off Sedans for SUVs 9 To produce 20 more SUVs (e.g. moving from A to B), Tesla must produce 20 fewer sedans. The 20 fewer sedans is the opportunity cost of producing 20 more SUVs. Opportunity cost: The highest-valued alternative that must be given up to engage in an activity. Tesla s production possibilities frontier
Increasing Marginal Opportunity Costs 10 On the previous slide, opportunity costs were constant. But opportunity costs are often increasing. Why? Some resources are better suited to one task than another. The first resources to switch are the one best suited to switching. Increasing marginal opportunity costs
Economic Growth on the PPF 11 As more economic resources become available, the economy can move from point A to point B. Shifts in the production possibilities frontier represent economic growth. Economic growth: the ability of the economy to increase the production of goods and services.
Technological Change in One Industry 12 This panel shows technological improvement in the automobile industry. The quantity of tanks that can be produced remains unchanged. Economic growth
EX: A PPF for Exam Grades 13 Suppose you have a limited amount of time to study for two exams, Economics and Accounting. What would the production possibilities curve for the exam grades look like? Would it be a straight line or a curved one? Why? Curved, since the marginal benefit of studying a topic for an extra hour decreases in the number of hours spend studying that topic.
Refer to the graph below. Which of the following combinations is unattainable with the current resources available in this economy? a. Combination G b. Combination F c. Combinations A or E d. All of the above. None of the combinations above can be attained with current resources. 14
Refer to the graph below. Which of the following combinations is unattainable with the current resources available in this economy? a. Combination G 15
Refer to the graph below. Which graph best represents an increase in the economy s resources? a. The graph on the left. b. The graph on the right. c. Both graphs. d. Neither graph. 16
Refer to the graph below. Which graph best represents an increase in the economy s resources? a. The graph on the left. 17
Comparative Advantage 18 PPFs for Apples and Cherries You can spend all of your time picking 20 pounds of apples, 20 pounds of cherries, or some combination.
Comparative Advantage 19 Your neighbor is more productive: She can pick 30 lbs of apples or 60 lbs of cherries.
Specialization and Trade 20 What if you and your neighbor decided to specialize and trade? Trade: The act of buying and selling. Could your neighbor benefit from trade? She is better at picking both apples and cherries Both of you can benefit from trade, by specializing in what you are relatively good at. Let s see how
Gains from Specialization and Trade 21 When you don t trade with your neighbor, you are at point A. When your neighbor doesn t trade with you, she is at point C.
Gains from Specialization and Trade continued 22 Figure 2.5 If you specialize in picking apples, you can pick 20 pounds. If your neighbor specializes in picking cherries, she can pick 60 pounds. If you trade 10 pounds of your apples for 15 pounds of your neighbor s cherries, you will be able to consume 10 pounds of apples and 15 pounds of cherries point B in panel (a).
Gains from Specialization and Trade continued 23 Figure 2.5 If you trade 10 pounds of your apples for 15 pounds of your neighbor s cherries, you will be able to consume 10 pounds of apples and 15 pounds of cherries point B in panel (a). Your neighbor can now consume 10 pounds of apples and 45 pounds of cherries point D in panel (b). You and your neighbor are both better off as a result of trade.
Gains from Specialization and Trade 24 You Your Neighbor Apples (in pounds) Cherries (in pounds) Apples (in pounds) Cherries (in pounds) Production and consumption without trade 8 12 9 42 Production with trade 20 0 0 60 Consumption with trade 10 15 10 45 Gains from trade (increased consumption) 2 3 1 3
Explaining the Gains from Specialization and Trade 25 How could both of you benefit from trade, when your neighbor was so much better than you? Absolute advantage: The ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources. Comparative advantage: The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.
Comparative Advantage and the Gains from Trade Opportunity Cost of Picking 1 Pound of Apples Opportunity Cost of Picking 1 Pound of Cherries You 1 pound of cherries 1 pound of apples Your Neighbor 2 pounds of cherries 0.5 pound of apples Opportunity costs of picking apples and cherries The basis for trade is comparative advantage, not absolute advantage. Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain the other goods and services they need by trading. 26
Refer to the graph below. Does the cost of automobiles (in terms of foregone aircraft carriers) get larger or smaller as the number of automobiles increases? (Your answer is valid for either curve.) a. Smaller b. Larger c. Can t tell just by looking at it 27
Refer to the graph below. Does the cost of automobiles (in terms of foregone aircraft carriers) get larger or smaller as the number of automobiles increases? (Your answer is valid for either curve.) b. Larger Why? 28
Refer to the graphs below. Each graph represents one country. Which country should specialize in the production of chips? a. Country A b. Country B c. Neither country. They both should produce some chips. d. Both countries should specialize in the production of chips. 29
Refer to the graphs below. Each graph represents one country. Which country should specialize in the production of chips? a. Country A 30