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Lecture 6 (post)

Lecture 6 (post) - Announcements A random walk through...

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Econ 1120-02 (Basu) Lecture 6 (Feb 7) Readings: Text Ch 19, pp 351-360 (International Trade)
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Announcements Quiz 2 starts at 12noon today and ends on Sunday @ midnight . Quiz 2 based on Ch 2 (pp 33-38 – just the shifts of the PPF), Ch 19 (pp 351-360 – International Trade) and Ch 3 (just plotting the demand curve and law of demand). For International Trade pay special attention to Lecture Notes from last class and this one (Feb 5 & 7).
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Recap Definitions of Absolute and Comparative Advantage. Drawing the PPF – why is the PPF a straight line in the 2x2x1 (Ricardian) trade model? Does comparative advantage mean a country should trade? [ role of world relative price vis-à-vis the domestic relative price ] Basis, Pattern and Gains from trade!
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A random walk through ‘Consumption’ Just like the PPF captures the trade-off between the two good in production, the ‘ community’ indifference curve (CIC) captures the trade-off in consumption for consumers for a given level of utility . A CIC is just the sum of all the individual indifference curves of consumers in an economy (all consumers are identical).
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Properties of CICs 1. They are downward sloping and ‘convex’ to the origin. 2. The slope at any point on a CIC captures the “Marginal Rate of Substitution” between the two goods – in other words, the trade off: how many units of one good is an economy willing to give up (forgo) to consume ONE more unit of the other good? 3. The slope along a CIC gets flatter as more of the horizontal good is consumed [due to diminishing marginal utility] and hence the CIC is convex to the origin.
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Lecture 6 (post) - Announcements A random walk through...

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