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econ2020-chapter02-notes

econ2020-chapter02-notes - Dr Duffy Microeconomics Notes...

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Dr. Duffy Microeconomics Notes from CHAPTER 2 of Frank and Bernanke
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Exchange and Opportunity Cost Should Joe Jamail write his own will? Jamail is the most renowned trial lawyer in  American History, nicknamed the “King of  Tortes.” He is listed 195 on the Forbes list of the 400  richest Americans, with net assets over $1  billion.
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Relevant Question Although Joe Jamail’s legal training makes him competent to write his own will and he could probably do it in about two hours, the relevant economic question is: What is his opportunity cost for that time? His opportunity cost may run to several thousand dollars per hour. Attorneys specializing in property law typically earn less than that, so it might cost him about $800 to hire a competent property lawyer to write the will.
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Frontier versus Developed Economies In a frontier economy, people tend to perform a variety of their own services. They grow their own food and cook it, make their own soap and cleansers, sew their own clothes, build their own houses, and so on. By contrast, a developed economy is characterized by specialization and exchange .
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Absolute Advantage One person has an absolute advantage over  another if he takes fewer hours to perform a  task than the other person.  
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Comparative Advantage One person has a comparative advantage over  another if his  opportunity cost  of performing a  task is lower than the other person’s  opportunity cost.   A person with a comparative advantage does  not always have an absolute advantage and    vice versa.
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Specialization and Exchange  The concept of comparative advantage, not  absolute advantage, is at the heart of  specialization and exchange.  If two workers have identical skills, it does not  matter which one performs which tasks.   If one worker is  relatively  more efficient at one  task than the other worker, specialization will  increase output for the economy.
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Absolute Advantage We have two workers and two tasks: web  page updating and bicycle repairs.   Time to update Time to update web page web page Time to complete Time to complete bicycle repair bicycle repair Paula Paula 20 minutes 20 minutes 10 minutes 10 minutes Beth Beth 30 minutes 30 minutes 30 minutes 30 minutes Paula has an absolute advantage at both tasks because it takes her less time than Beth to do either task.
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Opportunity Costs of Tasks Opportunity Cost of Opportunity Cost of updating a web page updating a web page Opportunity Cost of a Opportunity Cost of a bicycle repair bicycle repair Paula Paula 2 bicycle repairs 2 bicycle repairs 0.5 web page updates 0.5 web page updates Beth Beth 1 bicycle repair 1 bicycle repair 1 web page update 1 web page update Paula has a comparative advantage for bicycle repair because she gives up fewer web page updates than Beth to complete a bicycle repair. Beth has a comparative advantage in web page updates because she gives up fewer bicycle repairs to do them.
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