Macroeconomics Memphis

How about Fishes: Rob has to give up ¼ berry to produce one fish while Bill gives up ½ berry to produce one fish. Hence Rob has lower opportunity cost and comparative advantage in production of fishes compared to Bill CHECK THE HANDOUT. HE MESSED UP AT THE END> GOT THE SAME ANSWER, but he wrote it wrong.

...Rob has the comparative advantage 1/4 smaller than 1/2. Rob has a lower opportunity cost.

Graph of autos and paintings - Need to get graph from email link. 1.Opportunity cost represents tradeoffs--you have to give up one thing to get another. The PPF shows this, in that when you want more autos produced, you must produce ____ ___, or when more paintings are to be produced, you must give up some automobile production. 2. Efficient points are when society is producing the most that it can, given its resources, and is __ the PPF. Inefficient points are ___ the PPF, when society is letting some resources go unused, so they are not producing as much as is possible. Unattainable points are ____ of the PPF--the region where society would *like* to be, but is unable because of limited resources 2. If Detroit's automobile production technology improved next year the PPF would shift _______ along the _painting or automobile?_______ axis.

1. More autos: Need to produce LESS PAINTINGS 2.Efficient - on the ppf; Inefficient - inside Unobtainable - outside the ppf. 3.Shift OUTWARD along automobile axis as shown by the darker line

Review: Positive/Normative analysis: A rapid growth rate of money is the cause of inflation. Positive/Normative analysis:The government should keep the growth rate of money low.

1.Positive FACT 2.Normative WHAT should be

Kona Quantity Demanded lbs: coffee / lb in$ Luke Ravi REST of market 10 3 0 23 8 9 3 32 6 14 7 68 5 18 12 85 4 22 18 110 At price of $6, Quantity demanded = Price increases from $4 to $5, what happens to quantity demanded? 4 22 18 110

14 + 7 + 68 = 89 lbs Price increase 4 to 5 leads to DECREASE from (22-18) + (18-12 ) +(110-85) = decrease of $35

To produce 80 fishes, Rob must give up 20 berries. To produce 1 fish he has to give up how many berries? His opportunity cost of producing one fish is ______ of a berry (berries).

20/80 = 1/4 or .25 Cost 1/4 of a berry

To produce 20 berries, Rob has to give up 80 fishes. Therefore, to produce one berry, he must give up how many fishes?

80/20 = 4 or 80 fishes divided by 20 berries. He must give up 4 fishes for every berry he gets.

At the current market price of $25, how will the market reach equilibrium?

A price decrease, decreasing the quantity supplied and increasing the quantity demanded. Remember, price will need to be lowered in order to get more people to buy. With the price decrease, more quantity will be demanded. Sellers produce less when price decreases, so quantity supplied will drop.

____ a nation's ppf represents economic growth. Outward shift; Inward shift; Moving up along; moving down along

An outward shift

At a productʹs equilibrium price: A),anyone who needs the product will be able to buy the product, regardless of ability to pay. B) the federal government will provide the product to anyone who cannot afford it. C) not all sellers who are willing to accept the price will find buyers for their products. D) any buyer who is willing and able to pay the price will find a seller for the product.

Any buyer who is willing and able to pay the price will find a seller for the product.

During the 1990s positive technological change in the production of chicken caused the price of chicken to fall. Holding everything else constant, how would this affect the market for pork (a substitute for chicken)? (In other words, how this this affect the demand for pork and the price of pork) Why?

B) The demand for pork would decrease and the equilibrium price of pork would decrease. Chicken & pork are substitutes. If chicken price drops, more people will buy chicken instead of pork. Demand for pork will decrease & price will decrease.

Berries Fish Rob 20 80 Bill 30 60 A Bill has a comparative advantage in catching fish. B) Rob has a comparative advantage in picking berries. C) Rob has a comparative advantage in catching fish and picking berries. D Bill has a comparative advantage in picking berries.

Bill has CA in picking berries He gives up 2 fishes; Rob would have to give up 4.

Berries Fish Rob 20 80 Bill 30 60 When it comes to production of Berries Bill can produce more than Rob .So Bill has the _____ ______ in production of berries. When it comes to production of Fish ___has absolute Advantage over ____ as he can produce more.

Bill has the Absolute Advantage in berries. Rob has the Absolute Advantage in Fish

START WITH BERRIES When it comes to berries Rob has to give up 4 fishes to produce one berry and Bill has to give 2 fishes to produce one berry. Who has the lowest opportunity cost and therefore has the Comparative advantage? Rob Oc = 4 bill = 2

Bill has the comparative advantage because he only has to give up 2 fishes (compared to Rob's 4) and therefore has the lower opportunity cost.

Berries Fish Rob 20 80 Bill 30 60 A) Bill has a greater opportunity cost than Rob for picking berries. B) Billʹs opportunity cost for catching fish is less than Robʹs. C) Rob has a greater opportunity cost than Bill for picking berries. D) Billʹs opportunity cost for picking berries and catching fish are both greater than Robʹs.

C Rob has greater opportunity cost than Bill for picking berries. He has to give up four each berry; Bill only has to give up 2. 80/20 vs 60/30

An economic principle that explains why people pursue different occupations is? comparative advantage. absolute advantage. international trade. NAFTA.

Comparative advantage

Dana faces increasing/decreasing/ constant opportunity cost in the production of sliders and wings?

Constant

Constant versus diminishing returns. What would graph look like? What is the difference?

Constant: Straight line - Each time a given number of units shifted; given number of units of other good given up (Example lose 20 of unit x for every 45 of unit y) Diminishing returns = Curve: The shape of a production possibility frontier when there are diminishing returns. As resources are transferred into industry B there are diminishing returns: successfully less produced each time. Every time we move resources, we get less gain - concave curve. Start out with certain amount of gain, and then each time we move resources we get less gain.

Specializing in the PRODUCTION of a good or service in which one has a comparative advantage allows a nation to _________ a combination of goods that lies outside it's own PPF? Consume Produce

Consume.

Which of the following would cause both the equilibrium price and equilibrium quantity of barley (assume that barley is an inferior good) to increase? Why?

Decrease in income. I THINK this is the reasoning. Not sure. Barley is an inferior good, & a decrease in income leads to an increase in demand of an inferior good. Increase in demand - producers would produce more of the good & charge more because of higher demand. So price and quantity would increase.

Automobiles and many other products are differentiated. As a result: Different countries may each have a comparative advantage in producing different types of automobiles. Consumers of automobiles have difficulty deciding what type of imported automobile to buy. The quality of imported automobiles is less than it could be. We see countries specializing completely in the production of automobiles.

Different countries may each have a comparative advantage in producing different types of automobiles.

What if there is some unemployment & people want more of a good. A society can increase output without giving up any other good employing more resources. ONLY through technological advances HAVE to give up production and consumption of another good.

Employing more resources. I think this is the reasoning: It could give up another good, but it doesn't HAVE TO because we have some unemployment -- we can hire more people (use more resources). Tech advances would enable us to have more of a good, but it's not the ONLY way in this case. Question could be worded differently & you would have a different answer!!!!! Tech will increase production and cause change in ppf Opportunity cost: You could give up another good and put more resources into the good that is demanded. He used the words "only" & "have to" in this case.

Graph 2-4 Food Products on Vertical / Plastic on horizontal. Three PPF for a nation. Look at graphs Return to set

Finish later

If society wants more of one good and All OF The Resources are fully utilized, what must it do?

Give up some of another good and incur opportunity costs. (All resources are fully utilized; if it wants more of one, must sacrifice something else.) If resources are not fully utilized, then it wouldn't have to do this.

Bill: To produce 60 fish, he has to give up ______ berries. His opportunity cost is _________?

He has to give up 30 berries. So his opportunity cost is 30/60 = 1/2 berry or .5 berries

Bill: To produce 30 berries he has to give up __________ fishes. To give up one berry he has to give up _______. So his opportunity cost for producing one berry = ________ fish?

He has to give up 60 fishes. To produce one berry, he has to give up 60/30 = 2 fish. Opp Cost = 2 fish

Assume that Chili has a comparative advantage in producing cantaloupes and exports cantaloupes to Brazil. We can conclude that Chili/Brazil has a _____ of producing cantaloupes relative to Chili/Brazil Labor costs are higherBrazil than in Honduras.

Honduras has a lower opportunity cost in producing bananas relative to Brazil.

See graph I sent you: Imagine that all of an economy's resources, such as land, labour and capital, were used in industry A. Then Q0 of A would be produced and none of B would be made. Alternatively, if all resources were transferred to industry B then Q5 of B would be produced and none of A would be made. If resources were divided between the two industries then a range of combinations of products is possible. For example, at point X the economy produces Q1 of product A and Q2 of product B; alternatively, resources could be allocated differently between the two industries and it could produce at point Y, producing Q3 of A and Q4 of B. All of the points on the frontier, such as X and Y, are said to be productively efficient because they are fully utilising the economy's resources. This is attractive because it shows that resources are being used properly and not wasted. When an economy is productively efficient it can only produce more of one product by producing less of another; resources have to be shifted from one product to another. The PPF therefore illustrates the concept of opportunity costs. As more units of product B are produced this involves shifting resources into industry B and out of industry A: this will involve sacrificing product A. Some units of A will be sacrificed to produce more of product B; the amount sacrificed is the opportunity cost. For example, the opportunity cost of producing the extra Q4 − Q2 units of B is Q1 − Q3 units of A

I think the page describes it beautifully, although I wish they didn't use Q0 ect. Look at the graph and read the information; it does a really great job explaining things.

An outward shift in a nation's PPF can occur..... Natural Disaster People demand more of a good Increase in labor force (such as immigration) Reduction in unemployment

In increase in the labor force (such as with immigration)

Recession - What effect on PPF? Point Inside, Outside, On PPF

Inside the PPF. Inefficient

In a free market society, the law of _________ would help determine whether we should produce all of A or B or some combination thereof. If more of demand of product A than product B, we would see the shift from X to Y or Y to X? What if consumers wanted more of product B? Explanation?

Law of supply and demand More of product A? X to Y More of product B? Y to X In a free market economy this decision would be taken by the market forces of supply and demand. If there was a high level of demand for product A rather than product B then Producers want to make more of A & would attract firms into this industry and out of B. The firms in industry A would need more resources, such as labour and materials, to meet the higher demand. This increased demand for resources would increase the price paid for them, attracting resources into this industry and out of industry B. Market forces triggered by an increase in demand forthe product would therefore lead to a reallocation of resources from one industry to another. Shift from point X to point Y.

If in the market for solar panels if the government offers tax breaks to encourage manufacturers to produce more solar panels? D = demand S= supply P =Equilibrium price Q= Equilibrium Quantity A) D increases, S no change, P and Q increase B) S increases, D no change, P decreases, Q increases C) D and S increase, P and Q decrease D) D no change, S increases, P decreases, Q decreases

Let's start with supply. We have tax breaks for producers, so supply will increase. There hasn't been a change in demand... just what is being supplied. So we have more supply with no change in demand ...... price will need to decrease (more supply than demand). Higher quantity because we have more supply w/o more demand.

Hurricane Katrina damaged a large portion of refining and pipeline capacity when it swept through the Gulf coast states in August 2005. As a result of this, many gasoline distributors were not able to maintain normal deliveries. At the pre-hurricane equilibrium price (i.e., at the initial equilibrium price), we would expect to see: I think???? You have a hurricane that limits your supply; so you are going to have a shortage of gas at the pre-hurricane price. That price was determined for a time when we had gas supply being delivered normally. The price of gas will now RISE. We have a shortage of supply and still have a regular demand. We wouldn't have quantity demanded = to quantity supplied - we are no longer at equilibrium. We wouldn't have a surplus of gas; the demand is still there, but there's less gas. We wouldn't have an increase for the demand in gas; we just have less supply. Equilibrium will have to change.

No ? Just no shortage in gas (supply). Demand same. So price will increase.

In the real world we donʹt observe countries completely specializing in the production of goods for which they have a comparative advantage. READ CAREFULLY Name 3 reasons why this is TRUE.

Not all goods and services are traded internationally Tastes for many traded goods are different in many countries because of globalization. Production of most goods involves increasing opportunity costs.

Look at figure of supply and demand curve homework 1. Price along vertical; Quantity on Horizontal axis. First graph shows two diagonals crossing each other. Look at which line is supply and which one is demand. You need to see how the graph is labeled on the test and on the homework. I find it helpful to label the graph. (Going up starting from 0 and making numbers higher; going across showing numbers increasing) 0, 5,10 (showing price rising) on the vertical graph; 0, 5, 10 across (showing quantity increasing) on the horizontal graph. It helps to figure out what is happening. The second graph shows the supply line completely vertical. Graph B for Michelangelo sculptures; Graph A for Ray Ban glasses. How do you read the graphs? How can you figure which is which?

On graph B, the supply stays the same, regardless of price and demand. We only have so many original sculptures from Michelangelo. When the price was at the lowest, the demand was the highest. (At the lowest price point, demand is highest). When the painting cost the most, demand was lowest. If you label your graphs with actual numbers, it's easy to see. (By 10's , 1000's , millions... it doesn't matter. Just look at different points on the graph, & then see what happens when the price is larger to the demand. With the raybans, price, supply, and demand are all interacting. Where is demand highest? (LOWER RIGHT part of demand line. Write highest demand). To determine demand, look at the quantity axis. As you move up the line, demand is DECREASING. With Supply line, supply is highest in the lower left. As you move up the line, supply INCREASES.

The amount of one good or time that must be sacrificed to obtain an alternative good.

Opportunity Cost

Rob had to give up 4 fishes for every one berry. Therefore, his _____ ____ for producing one berry is four fishes. Every time he chooses to get a berry, it costs him ____ fish.

Opportunity Cost 1 berry - Cost of 4 fish

A combo of 60 sliders and 50 hot wings would be?

Outside the PPF. We would need a technological advance, increase in labor force, or - something that would increase the PPF and give us an outward shift in the curve. Some goods and services: Trade can allow us to consume more product than we can produce on our own: Another country can produce some items more efficiently than you can, and that you can produce some products more efficiently than it can; through trade both countries can TRADE. Through trade both countries can benefit.

Production possibilities frontier

PPF : A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology. (production possibilities frontier the combinations of two goods that can be produced if the economy uses all of its resources fully and efficiently)

The recession would most likely be represented in a PPF graph by a point outside, inside , or on the frontier?

Point Inside the frontier

Where do we find economic efficiency on the PPF?

Points along the curve are at max efficiency. Can't produce more of 1 without producing less of another.

Which points would be considered an inefficient economy? Why?

Points inside the curve. You could still produce more goods or services without an opportunity cost.

The PPF or PPC (Curve) shows the maximum output that can be produced in an economy at any given moment, given the resources available. If an economy is fully utilizing its resources, then it will be producing on the PPF. Any points _____ the curve show economic proficiency. Any points ____ inside the line or curve show economic inefficiency.

Points on the curve = economic efficiency Points UNDER the curve = inefficiency

Why might we get diminishing returns (curve) instead of a constant (line)? Resources are unlikely to be __________ productive in both industries. For example, some ____________ may not be able to transfer ________ from 1 industry to another.

Resources are unlikely to be equally productive in both industries. For example, one industry might need higher skilled employees or specialized machinery. Some workers might not be able to transfer skills from 1 industry to another.

Berries Fish Rob 20 80 Bill 30 60 A) Rob has a comparative advantage in catching fish. B) Bill has an absolute advantage in catching fish. C) Bill has a comparative advantage in catching fish. D) Rob has a comparative advantage in picking berries and catching fish.

Rob has a comparative advantage in catching fish

Disease kills half the economy's cows. If this nation produces milk, the PPF for milk will shift inward, outward, or stay the same? If the nation wasn't putting any resources into producing milk, then the effect on the PPF would be: Shift inward/outward/stay the same

Shift Inside Stay the same

Economic growth is represented on the PPF model by the PPF Steeper; flatter; shifting inward; shifting outward

Shifting outward

Look at Graph 2-1 Which combinations would appear along the PPF? What is a possible combination that would appear inside (under) PPF?

Sliders 80; Wings 0 Sliders 60; wings 25 Sliders 40; wings 50 Sliders 20; wings 75 Sliders 0 ;Wings 100 All of these combos would be economically efficient & therefore along the curve. If I made 55 sliders and 25 wings, I would be inside the curve. I could still make more w/o an opportunity cost. Any combos that are less than what is shown would be inside the curve. Another ex: 17 sliders/ 72 wings.

In the real world we donʹt observe countries completely specializing in the production of goods for which they have a comparative advantage. This is NOT one of the reasons: On the test, he asked for all the reasons EXCEPT one. This was the answer when asked what the reason are EXCEPT.....

Some countries have more resources than other countries.

Review: Two products A & B & you choose A or B only because price is lower, you consider the products to be ? An ________ is represented by a rightward shift of the demand curve while an ________ is represented by a movement along a given demand curve.

Substitutes Increase in demand; increase in quantity demanded

Economic efficiency versus economic inefficiency. What will we see on the curve? What do each of the terms mean?

The PPF or PPC (Curve) shows the maximum output that can be produced in an economy at any given moment, given the resources available. If an economy is fully utilizing its resources, then it will be producing on the PPF. Any points on the line or curve show economic proficiency. Economic efficiency = on the curve. Points on the curve are economically (productively) efficient: They are FULLY utilizing the economies resources. Economic inefficiency = under the curve If a nation not fully utilizing its resources, the points will be under the curve. They could still be producing more resources without any opportunity costs.

Hurricane Katrina damaged a large portion of oil refining and pipeline capacity in the Gulf coast states. In the market for gasoline, what happened to the SUPPLY curve and how did that affect the price?

The supply curve SHIFTED to the LEFT (decrease in supply); since demand is the same, price will increase to achieve equilibrium.

Opportunity cost: can figure out which to divide by using Algebra (see answer) but if you get confused, remember that the thing you give "UP" goes "UPTOP" and gets divided by other number. To produce 60 fish I give up 30 berries..... 30 goes uptop. 30/60. To produce 80 of something I give up 20, so 20/80. Then just reduce (or divide top number by bottom) to get your opportunity cost of 1. To produce 20 he gave UP 80, 80/20 = 4

To produce 60, I give up 30. To produce 1, I would give up X SET UP A Proportion and solve for X.

REVIEW In response to a decrease in price in coffee, there would be an .....increase/decrease in demand/ quantity demanded. (All else held constant). For Demand: Price and Quanity are directly or inversely related?

increase in quantity demanded. Inversely related

Look at chart on homework 1. Make sure you note which line is Supply & which is Demand. Remember price is rising up the axis; quantity increases going across, & see how demand and supply are affected. If the price is $10, demand is? What is the supply? Price is $20, demand is ? What is the supply? As the price increases, demand is ____ When price = $20, the ____ and the ____ are the same. As soon as you go to $25, what happens? People only want 500, but the supply is at ____ At the price of $25, how many units will be sold?

price 10 = 800 Demanded supply = 200 price 20= 600 Demanded supply of 600 Demand is decreasing. At $20, demand and supply are the same. At $25, the supply is at $800. So supply $300 higher than the demand. You have a surplus of $300. At $25, 500 units will be sold.

Outward shift in the fpp Possible reasons:

• more training of employees, enabling them to be more productive; • greater investment in capital goods such as machines and equipment—in the short run this would mean that resources would have to be shifted from consumption goods toward capital goods, and in the long run greater investment would enable the economy to produce more products for consumption; • an increase in the population size, for example, through immigration; • improvements in technology