5th lecture

# 5th lecture - Economics 101 Lecture 5 Gains from trade...

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Economics 101 Lecture 5

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Gains from trade Tiger can mow his lawn in 2 hours In two hours he can earn \$10,000 doing commercials Jim takes 4 hours to mow the lawn and earns \$20 at McDonalds in that time
What if Tiger loves to mow? Tiger is willing to pay up to \$1000 for the opportunity to mow his own lawn Jim hates to mow – he would be unwilling to mow anyone’s lawn for less than \$1000 By specializing in golf, Tiger gains \$9000 By specializing in mowing, Jim loses \$1020 Tiger can compensate anywhere Jim between \$1020 and \$9000 for trade to work

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The Economic Pie The total gains from trade in the first case = \$10,000 – 20 = \$9980 The total gains from trade in the second case = \$9000 - \$1020 = \$7080 The gains from trade are gains in economic surplus received by individuals If we increase the pie, we can all have more.
Production Possibilities in a One- Person Economy Example 4.4 Chris can produce 6 sq yd/wk of shelter or 12 lb/wk of food. If Chris is the only person in the economy, describe the economy's production possibilities curve .

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Shelter (sq yd/wk) Food (lb/wk) 6 4 2 4 8 12 0 The Production Possibilities Curve: All combinations of food and shelter that can be produced with Chris’s labor
Production Possibilities Curve: All combinations of shelter and food that can be produced with Chris’s labor Shelter (sq yd/wk) Food (lb/wk) 6 4 2 4 8 12

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The absolute value of the slope of the production possibility curve is 6/12 = 1/2. For Chris, this means that the opportunity cost of an additional pound of food each week is 1/2 sq yd/wk of shelter. Shelter (sq yd/wk) Food (lb/wk) 6 4 2 4 8 12
Shelter (sq yd/wk) Food (lb/wk) 6 4 2 4 8 12 Attainable, efficient points A B C D E F

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Shelter (sq yd/wk) Food (lb/wk) 6 4 2 4 8 12 Unattainable point Attainable, inefficient point A B C D E F
Example 4.5 . Dana can produce 4 sq yd/wk of shelter and 4 lb/wk of food. If Dana is the only one in the economy, describe the economy's production possibilities curve. 4 4 Food (lb/wk) Shelter (sq yd/wk) Production Possibilities Curve: All combinations of shelter and food that can be produced with Dana's labor 2 2 For Dana, the opportunity cost of an additional pound of food each week is 1 sq yd/wk of shelter.

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Production Possibilities in a Two- Person Economy In the preceding examples, Chris has a comparative advantage in producing food, because the opportunity cost of producing food is only half as large as it is for Dana. By the same token, Dana has a comparative advantage producing shelter.
The Principle of Increasing Opportunity Cost (Also called “The Low-Hanging-Fruit Principle”) In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.

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Example 4.6. Chris can produce 6 sq yd/wk of shelter or 12 lb/wk of food. Dana can produce 4 sq yd/wk of shelter and 4 lb/wk of food. If Chris and Dana are the only two people in the
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## 5th lecture - Economics 101 Lecture 5 Gains from trade...

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