Comparative_Advantage__Lesson_2_

Comparative_Advantage__Lesson_2_ - A Simple Economy Prices...

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1 Lesson 2 1 A Simple Economy • Prices are determined by supply and demand • Focus on supply in this lesson • With fully-employed resources, an increase in quantity supplied of any one good necessarily means a decrease in the quantity supplied of some other good Lesson 2 2 Suppose there are two goods: Bread (good X ) Cheese (good Y ) No economy can produce unlimited quantities of goods Idea captured by the Production Possibilities Frontier (PPF) * * Note that in some textbooks this is referred to as a Production Possibilities Curve ( PPC ) Lesson 2 3 X Q Y Q 100 500 E Can’t reach points like E
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2 Lesson 2 4 X Q Y Q 100 500 5 1 500 100 slope = = Δ Δ = X Y Q Q Lesson 2 5 X Q Y Q 100 500 Economy with strong demand for Y relative to X might produce at point like A 1 Economy with strong demand for X relative to Y might produce at point like A 2 1 A 2 A Lesson 2 6 X Q Y Q 100 500 At either point ( A 1 or A 2 ), the opportunity cost of each extra unit of X is 1/5 unit of Y 1 A 2 A
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Comparative_Advantage__Lesson_2_ - A Simple Economy Prices...

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