Microeconomics - Section Notes Tradeoffs January 10 &...

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Unformatted text preview: Section Notes Tradeoffs January 10 & 11, 2011 1 Class Information • GSI: _______________ • Email: _______________ • Office: _______________ • Office Hours: _____________________ _____________________ Other Key Details: • 5 “Pop” Quizzes based on your weekly homework at the beginning of class. • Section is intended to quickly review what is taught in lecture, and teach you how to implement in the context of everyday problems. 2 Tradeoffs Concept Review Economics is about tradeoffs. If you choose to use 1 pound of sugar to produce 10 sodas that means you give up the opportunity to use that pound of sugar to produce 20 candy bars. This is what we call an opportunity cost. An opportunity cost is what you give up of good X in order to consume Y. • Opportunity cost for 1 soda = 2 candy bars • Opportunity cost for 1 candy bar = 1 2 sodas In economics, we often restrict our attention to only two goods. Why? Notice that opportunity cost is always measured in units of the other good (i.e. the opportunity cost of candy bars is in terms of soda). We have a simple formula for denoting the opportunity cost of good X: ￿ ￿ ￿ Loss of Y ￿ ￿ ￿ Opportunity Cost of Good X = ￿ Gain of X ￿ A convenient way of modeling the opportunity cost of two goods is to graph their production possibilities frontier (PPF). This represents the maximum of any good you can produce given your finite resources. 1 Examples 1. Suppose Keith has eight hours per day to contribute to working. It takes him 4 hours to produce one complete crossword puzzle and 1 hour to produce one complete Sudoku puzzle. (a) Draw the PPF. Make sure to label your axes. (b) Suppose Keith has a stroke of genius and it takes him half as long to do everything. Draw the new PPF with a dashed line. (c) Suppose Keith reads a book on mastering crosswords and can now do them four times as fast. How does this change the PPF? (d) Are Keith’s opportunity costs constant, increasing, or decreasing? 2. Suppose the PPF shifts and the economy moves from point A to point B on the PPF below. Then the opportunity cost of producing one more textbook will ________. while the opportunity cost of producing one more romance novel will ________. 2 ...
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This note was uploaded on 02/21/2011 for the course ECONOMICS 101 taught by Professor Gerson during the Winter '11 term at University of Michigan.

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