Ch02Spring2011ppt - CHAPTER 2 And Chapter 18: pp. 458-469...

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Unformatted text preview: CHAPTER 2 And Chapter 18: pp. 458-469 THE BASIC ECONOMIC ECONOMIC PROBLEM: PROBLEM: SCARCITY Spring, 2011 1 SCARCITY REQUIRES TWO TYPES SCARCITY OF CHOICES OF Production choices: What to produce? What How to produce? How Distribution choices Distribution For whom? Choices require sacrifice or cost Choices Termed “opportunity” costs Termed Opportunity costs may be constant, Opportunity or increasing. 2 CHOICES ILLUSTRATED CHOICES WITH PRODUCTION POSSIBILITIES SCHEDULE POSSIBILITIES Assumptions: Assumptions: Fixed resources Fixed Full employment Full Maximum efficiency Given level of technology Given Textbook example (P. 36) Textbook Military goods versus consumer Military goods 3 INCREASING OPPORTUNITY COSTS OF PRODUCTION, P. 36 36 Identify attainable, non-attainable points, and opportunity costs Figure 2.1 DIFFERENTIAL RESOURCE DIFFERENTIAL PRODUCTIVITY AND INCREASING OPPORTUNITY COSTS COSTS High quality land: 1 acre High 60 wheat or 30 corn 60 So 1 wheat costs ½ corn. So And 1 corn costs 2 wheat Low quality land: 1 acre 40 wheat or 10 corn. 40 So 1 wheat costs ¼ corn. And 1 corn costs 4 wheat WHAT DOES THE PRODUCTION WHAT POSSIBLITIES SCHEDULE LOOK LIKE FOR BOTH PIECES OF LAND TAKEN TOGETHER? 5 DIFFERENTIAL RESOURCE DIFFERENTIAL PRODUCTIVITY AND INCREASING OPPORTUNITY COSTS: P. 2 COSTS: WHEAT PRODUCTION: WHEAT 60 wheat from high quality land. 40 wheat from low quality land. 40 100 is total from all land But no corn is produced if all But land is in wheat land CORN PRODUCTION CORN 30 corn from high quality land. 10 corn from low quality land. 10 40 is total from all land. But no wheat is produced if all But land in corn. 6 DIFFERENTIAL RESOURCE DIFFERENTIAL PRODUCTIVITY AND INCREASING OPPORTUNITY COSTS: WHEAT Slope = -2/1 100 Slope = -4/1 40 30 40 CORN Note that differential opportunity costs leads to “bowed out” shape of PPC. This is because opportunity costs differ among economic resources. 7 ECONOMIC GROWTH Economic growth Economic Increased number of resources E.g. population growth Increased quality of resources E.g., training and education Technological change E.g., research and development See Exhibit 3, page 41 8 CONSUMPTION VS. CONSUMPTION INVESTMENT CHOICES AND ECONOMIC GROWTH ECONOMIC Consumption goods are consumed or Consumption used up in the year in which they are produced Satisfy immediate wants are needs Investment goods are durable. Investment Raise productive capacity in the Raise future 9 ALPHA’S AND BETA’S PRESENT AND FUTURE PRODUCTION POSSIBILITIES, P. 42 POSSIBILITIES, Figure 2.4 Constant Opportunity Costs of Constant Production Production Left Shoes 50 Right Shoes 50 11 PRODUCTION POSSIBILITIES PRODUCTION AND INTERNATIONAL TRADE (text: pp. 461-464) TRADE Constant (but different) opportunity Constant costs in each country costs Purpose of example: Demonstrate basis of trade Demonstrate Demonstrate gains from trade Demonstrate Potential costs of international Potential specialization Reallocation problems Reallocation Income distribution issues The interdependence issue 12 INTERNATIONAL INTERNATIONAL SPECIALIZATION: SPECIALIZATION: Before Trade In isolation before trade: U.S. : 100 Grain or 50 Steel Japan: 40 Grain or 40 Steel Japan: Opportunity costs of Steel: U.S. 1 Steel = 2 Grain U.S. Japan: 1 Steel = 1 Grain Japan: Opportunity costs of Grain: Opportunity U.S. 1 Grain = 1/2 Steel U.S. Japan 1Grain = 1 Steel 13 U.S. Production U.S. Possibilities Possibilities Grain 100 U.S. pretrade 20 steel and 60 Grain 60 20 steel 50 14 Japan Production Japan Possibilities Possibilities Grain Japan Pre-trade 10 Steel and 30 Grain 40 30 10 40 steel 15 SPECIALIZATION Total World Output in Isolation Total U.S. : 60 Grain and 20 Steel Japan: 30 Grain and 10 Steel Total world output: 60 + 30 = 90 Grain 60 20 + 10 = 30 Steel 20 Total World Output With Specialization: U.S. Produces100 Grain Japan produces 40 Steel Japan 16 SPECIALIZATION AND SPECIALIZATION TRADE: OUTSIDE LIMITS TO THE TERMS OF TRADE TO U.S. produces grain and wants steel. U.S. can get each steel in U.S. isolation by giving up 2 grain. So U.S. wants to pay less than 2 grain for each steel. Japan produces steel and wants Japan grain. grain. Japan can get each grain in Japan isolation by giving up 1 steel. So Japan wants receive more than 1 grain for each steel. 17 OUTSIDE LIMITS TO TERMS OF OUTSIDE TRADE TRADE Japan produces Steel: Japan 1 Steel must be worth > 1 grain Steel for Japan to trade for US. Produces Grain: US. 1 Steel must be worth < 2 grain Steel for U.S. to trade 18 WILL BOTH WILL COUNTRIES BE BETTER OFF WITH TRADE? YES!! TRADE? Assume 1 steel = 1.5 grain Assume United States: United In isolation: 20 steel & 60 grain In With trade: 20 steel & 70 grain With Japan: Japan: In isolation: 10 steel & 30 grain In With Trade: 20 steel & 30 grain 19 U.S. Production U.S. Possibilities Possibilities Grain 100 Slope = 1 steel =1.5 grain U.S. pretrade 20 steel and 60 Grain Steel 50 20 Japan Production Japan Possibilities Possibilities Grain 40 Slope = 1 Steel = 1.5 grain Japan Pretrade 10 Steel and 30 Grain steel 40 21 SO WHY IS THERE SO RESISTENCE TO FREE INTERNATIONAL TRADE? INTERNATIONAL Distributional problems Distributional Adjustment problems Adjustment National defense arguments. Infant industry arguments. Infant Free trade vs. “fair” trade. Free Can comparative advantages be Created by government Created policies? policies? 22 CHAPTER 2 HIGHLIGHTS 1. 1. 2. 3. 4. 5. 5. 6. 6. 7. 7. 8. Concept of PPC & the basic Concept economic problem: scarcity economic Slope of PPC: opportunity Slope costs costs Production inside PPC: Production unemployment or underunemployment employment Shifts of PPC: economic Shifts growth PPC limits consumption w/o PPC specialization & trade Specialization & trade: based Specialization on comparing opportunity costs. Benefits of specializ. &trade Costs of trade specializ. & Costs trade trade 23 QUESTIONS???? 24 24 ...
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This note was uploaded on 01/12/2012 for the course ECN 211 taught by Professor Kingston during the Spring '08 term at ASU.

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