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Econ 101 Winter 2010 Lecture 3

# Econ 101 Winter 2010 Lecture 3 - Economics 101...

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Click to edit Master subtitle style Lecture 1 Economics 101 Microeconomics University of Michigan Winter 2010 Lecture 3

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Lecture 1 22 Announcements n Reading Guide available on CTools n Today’s reading n Chapter 2 (especially p 36 – 49). n No class on Monday (MLK Day) n Reading for Wednesday: n Chapter 3, pp. 74 – 78 n Chapter 4, pp. 101-102 n Discussion Sections meet this week n Quiz in next week’s discussion section
Lecture 1 33 Australia Fine wool (bales) Coarse wool (bales) 2 m 1 m

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Lecture 1 44 New Zealand Fine wool (bales) Coarse wool (bales) 0.5 m 0.75 m
Lecture 1 55 Australia Fine wool (bales) Coarse wool (bales) 2 m 1 m Opportunity cost of 1 bale of fine wool  is  ½  a bale of coarse wool Opportunity cost of 1 bale of coarse  wool is 2 bales of fine wool Slope = rise/run = -1/2  0.4 m 0.2 m

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Lecture 1 66 New Zealand Fine wool (bales) Coarse wool (bales) 0.5 m 0.75 m Opportunity cost of 1 bale of fine wool  is 3/2 bales of coarse wool Opportunity cost of 1 bale of coarse  wool is 2/3 of a bale of fine wool Slope = rise/run = -3/2  0.4 m 0.6 m
Lecture 1 77 Allocating productive resources How should production be organized? Depends upon: n How much fine wool and how much coarse wool people want/need/desire n The relative costs of producing in the two locations

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Lecture 1 88 Allocating productive resources If consumers only want coarse wool, there is no allocation problem. n Both producers devote all available productive resources to coarse wool production n Total output = 1m bales + 0.75m bales = 1.75m bales If we wish to have some fine wool, we must forgo some coarse wool production n Who should produce the first bale of
Lecture 1 99 Allocating productive resources Compare opportunity costs of producing the first bale of fine wool for the two producers Country Opportunity Cost of 1 bale of fine wool Australia 1/2 bale of coarse wool New Zealand 3/2 bales of coarse wool

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Lecture 1 10 10 Comparative Advantage Definition: If Producer A has a lower opportunity cost of producing a good than Producer B, we say that A has a comparative advantage in production of that good. Implication: Output of any particular good is
Lecture 1 11 11 Comparative Advantage From our example: n Australia has the comparative advantage in producing fine wool n NZ has the comparative advantage in producing coarse wool Our reasoning suggests that n

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Econ 101 Winter 2010 Lecture 3 - Economics 101...

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