Ch 2 - What is Comparative Advantage 1 The ability to...

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Unformatted text preview: What is Comparative Advantage? 1. The ability to produce a good at a lower opportunity cost than others can. Chapter 2 Chapter 2. The most highly valued alternative that a 3. 4. Activity 2.2: Which of the following statements most reflects your beliefs? Please explain. 1. Even if our government did not regulate businesses, 2. 2. 3. generally businesses would end up doing what society wants most. We need government to oversee planning and zoning because private property owners have no incentive to do what’s best for society as a whole. what’ We need government to oversee businesses because businesses are inherently so motivated by profit that they don’t care about society or society’s ills. don’ society’ person gives up when they choose one option over another. The ability to produce a good faster or cheaper than someone else. The advantage that a middleman produces by reducing transactions costs. Activity 2.2 “The best way to protect elephants, walruses and other ivory producing species is by outlawing the importation of ivory and by creating stricter laws again poaching (for example: increasing the penalty for poaching).” poaching).” Please comment on the effectiveness of this method of protection. Which of the following most accurately states the economic significance of exchange? 1. Physical goods have value because they exist; 2. 3. 4. exchange can neither increase nor decrease their value. Production of physical goods creates value; exchange merely redistributes this value. Exchange reduces value since it consumes resources without adding to the physical supply of goods Exchange creates value by moving goods from parties who value them less to parties who value them more. If a motorist is stranded in front of a pay phone and has only dollar bills, and he ends up buying a quarter from a passerby for $1 so he can use the pay phone, 1. The passerby was made better off at the expense of the stranded motorist. 2. Economic theory cannot explain why the stranded motorist bought the quarter for $1. 3. The stranded motorist valued the quarter more 4. than he valued the dollar bill and made an economically sound decision; both people are better off. The stranded motorist clearly doesn’t doesn’ understand that four quarters are worth $1. What happens in a country that What does not enforce property rights? 1. 2. 3. 4. 5. Little incentive to improve property Little incentive to conserve property Little incentive to take care of property All of the above None of the above 9:30 class: Activity 1.4: Ceteris Paribus — define it and tell me the significance of it. How do economists use it when making predictions about people’s behavior? Chapter 2—Tools of the economist 2— what, how, for whom to produce? Activity 2.1: Ceteris Paribus — define it and tell me the significance of it. How do economists use it when making predictions about people’s behavior? Video – Opportunity Cost Chapter 2—Tools of the economist 2— Chapter 2—Tools of the economist 2— 1. Opportunity Cost— Cost— 1. Time AND money 2. OC are subjective—no one can tell us subjective— our true OC, gov’t spending your money our gov’ 3. Failure to consider OC—poor policy: OC— Performing Arts Center what, how, for whom to produce? 2. Trade Creates Value A. Voluntary Exchange 1. Trade is NOT a zero-sum game; both parties (in zerovoluntary exchange) are made better off — field trip & bagged lunch 2. Trade creates wealth — by taking something that was NOT as valuable from one and giving to someone who values it more highly B. Transactions Costs what, how, for whom to produce? A. Voluntary Exchange B. Transaction costs—barrier to trade costs— • Internet has greatly reduced transaction costs & increased trade & value C. Middleman = Reduces costs of trade & Reduces increases value One red paperclip One Tools-con’t 1. 2. 3. Opportunity Cost: Trade Creates Value Property Rights A. Assumes free market — not gov’t intervention. gov’ http://www.youtube.com/watch?v=WPUi8Ru08D8 Tools-con’t Tools-con’t 3. Property Rights 3. Property Rights A. Assumes free market — non-gov’t intervention. non- gov’ B. Property rights include 3 elements: • Right to exclusive USE of property • Legal protection against others using it without owner’s permission • Right to transfer, sell, exchange or mortgage the property A. Assumes free market — non-gov’t intervention. non- gov’ B. Property rights include 3 elements: C. Can use property as long as you don’t infringe on don’ anyone else’s property rights. else’ D. Good things that result from having Private Property rights: C. Can use property as long as you don’t infringe on don’ anyone else’s property rights. else’ ex-can use your car, but not to run over neighbor’s cat or flower garden. ex-can drive a motorcycle as long as the muffler noise is not ear splitting! Good things that result from having Property Rights: 1. Property owners have the Incentive to consider the desires of others and lose by NOT considering the rights of others (if not … increased OC) • Using neutral colors when you paint the interior of your home. Making your yard beautiful….higher selling price • Therefore: strong incentive to use property in a way that benefits society….gov’t doesn’t society… gov’ doesn’ need to MAKE you do this. Tools -- Property Rights 2. Incentive to take care of your property…to protect the value. • How does gov’t intervention (i.e. rent controls) change that incentive?) • Common Property problem—school desks; litter on roadside (not in your front yard) 3. Incentive to conserve • Electric bill at parent’s house vs. when YOU pay • Ivory from Africa Tools, Tools, Property Rights 4. Incentive to be careful with property • Put fence up around pool • Fix rickety stairs leading to your front door Tools, Property Rights 4. Incentive to be careful with property • Put fence up around pool • Fix rickety stairs leading to your front door Private property owners can be held accountable for damage done to others from THEIR private property. Private property owners can be held accountable for damage done to others from THEIR private property. – Video: Property Rights Gov’ts that DON’T enforce property rights cause: Gov’ DON’ • Little incentive to improve property • Little incentive to conserve property • Little incentive to take care of property Tools—Con’t 4. Production Possibilities Curves A. All possible combinations of goods & services that can be produced given a country’s country’ resources. Assumes: • Fixed amount of resources • Fixed amount of technology • Efficient use of resources Tools—Con’t PPC 4. Production Possibilities Curves • Why does it have the shape it does? B. Example of PPC Can we PRODUCE beyond our PPF? Can Can we CONSUME beyond our PPF? Tools—Con’t 4. C. Shifting the curve—(things that cause PPC shift) to 1. increase no. of resources 2. increase in technology a. Innovation b. Entrepreneurship 3. more favorable laws, incentives 4. reduce leisure time (increase work) D. what different points on the curve mean. what E. Rates of shift … investment v. Rates consumption goods Activity 2.3 & PRS— PRS— (PMA) Possible multiple answer Draw a graph of a non-linear nonproduction possibilities curve and label point A (a country producing more INVESTMENT goods) and point B (a country producing more CONSUMER goods) to answer the following question: Tools of the economist 5. Comparative Advantage – Producing coffee in the U.S. – Bill Gates types faster than his secretary… secretary… – How does this work? (PMA) Economies that produce more consumer goods and fewer investment goods (circle either A or B on your graph to show that point): 1. Will have a greater growth rate than countries which produce more investment goods. 2. Will have a slower growth rate than countries which produce more investment goods. 3. Are giving up future consumption for present consumption. 4. Are giving up present consumption for future consumption. Comparative Advantage: First: From the data below, draw the PPC for each country. Comparative Advantage: Comparative Advantage: First: From the data above, draw the PPC for each country. Now, let’s see if they can consume MORE if they trade. They want to trade if there is a comparative advantage. Chicken 6 5 4 Aside: Why are these PPCs LINEAR? Nigeria 3 2 South Africa 1 0 0 2 4 6 8 10 12 CORN • SA’s OC for 1 # chicken = 4 bushels corn SA’ • N’s OC for 1 # chicken = 1 bushel corn • Are the OC’s different? Who has the CA OC’ for producing chicken? • SA’s OC for 1 # chicken = 4 bushels corn SA’ • N’s OC for 1 # chicken = 1 bushel corn • Are the OC’s different? Who has the CA OC’ for producing chicken? Nigeria • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ From zero units to 4 units (they GET 4) From they GIVE UP from 3 to 2 (1 unit) Convert that to a 1: something ratio Convert 1: ¼ 1: • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ • N’s OC for 1 bushel corn = 1 # chicken • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ • N’s OC for 1 bushel corn = 1 # chicken • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ • N’s OC for 1 bushel corn = 1 # chicken – It’s still 1:1 (get 2, give up 2) It’ • Are the OC’s different? Who has the CA OC’ for producing corn? • SA’s OC for 1 bushel corn = 1/4 # chicken SA’ • N’s OC for 1 bushel corn = 1 # chicken • Are the OC’s different? Who has the CA OC’ for producing corn? South Africa • Can these 2 countries specialize, exchange and both be better off? • Does trade create value? • Does trade create value? Comparative Advantage: First: From the data above, draw the PPC for each country. Now show PPC if they specialize & trade. Chicken 6 5 • Using the data above, on one graph, please graph • • the PPC for both countries before trade (ex ante) Label each line with country name After trade, what happens to the PPC? Draw the NEW PPC in with a dotted line. (There will just be 2 points on this line.) What do countries produce? How do they produce? Who gets the end product? 4 3 Nigeria w/trade 2 Now, add in the PPC if they specialize and exchange…who exchange… will produce which good? South Africa 1 0 0 2 4 6 8 10 12 CORN Chapter 2 is about different types of economies…market on one hand, economies… command on the other hand. A market economy uses comparative advantage, opportunity cost, property rights, etc., to determine what, how and who gets output. IN a command economy…if markets DON’T show you how to produce, who DON’ does and how does it work? (PMA) Which of the following can (PMA) cause the Production Possibilities Frontier to shift out? 1. New technology 2. Increase in resources 3. Increase in education 4. Increase in job training The law of comparative advantage implies that a nation, individual or region should produce those things for which it is a _____ opportunity cost producer and trade for those things for which it is a _____ opportunity cost producer. 1. Low, high 2. High, low (PMA) The law of comparative advantage suggests that 1. Curtailing U.S. trade with other nations would make U.S. consumers worse off. 2. Everyone would be better off if they were 2. self-sufficient. self- 3. Countries will tend to export the commodities for which they are low opportunity cost producers. End of Chapter 2 ...
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