business economics notes-4

business economics notes-4 - Econ5103Business...

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Econ5103 Business  Econ5103 Business  Economics Economics Lecture 4 1
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Part I Part I International trade and  trade policy 2
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Learning Objectives Learning Objectives Define a production possibilities curve Define the consumption possibilities in both closed and  open economies Explain how production and consumption are determined Explain how comparative advantage translates into market  advantage Use supply and demand analysis to show the gains from  trade Identify winners and losers in a market as a result of trade Define protectionism and explain its inefficiency Use supply and demand analysis to explain how tariffs  and import quotas affect market outcomes 3
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Comparative advantage as a basis for  Comparative advantage as a basis for  trade trade Comparative advantage: Each person specialises in the  activity which he is relatively most efficient Specialisation combined with trade between producers of  different goods and services, allows a society achieve a higher  level of productivity The principle of comparative advantage tells us that we can all  enjoy more goods and services when each country produces  according to its comparative advantage, and then trades with  other countries 4
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Production and consumption possibilities  Production and consumption possibilities  and the benefits of trade and the benefits of trade Closed economy: An economy that does not trade with the rest of the  world Open economy: An economy that trades with the rest of the world 5
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Production possibilities curve for a  Production possibilities curve for a  many-worker economy many-worker economy Example: Brazil’s 2-good economy -  coffee  and  computers Two workers who work 50 weeks/year Carlos Can produce 100 kg of coffee/week or 1 computer Maria Can produce 100 kg of coffee/week or 2  computers 6
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Production possibilities curve for  Production possibilities curve for  Brazil’s many-worker economy Brazil’s many-worker economy 7
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Production possibilities curve Production possibilities curve PPC for a two-good economy shows the maximum amount  of one good that can be produced at every possible level of  production of the other good The slope of the PPC at any point indicates the opportunity  cost The more of a good that is already being produced, the  greater the opportunity cost of increasing production further  The slope of the PPC becomes more and more negative as  we read from left to right (outwardly-bowed shape) 8
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Consumption possibilities with and  Consumption possibilities with and  without international trade without international trade Consumption possibilities: The combination of goods 
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business economics notes-4 - Econ5103Business...

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