ECO 201 Jan. 26, 2010 Economists of the Day: Alan Greenspan 1926-- -Chairman of the Federal Reserve Assumptions Fixed Resources & Technology Full Efficient use of Resources & Technology Diminishing Marginal Rate of Transformation DEF: How much of one good or service you give up to produce one unit of another good or service. It is the slop of PPF ?Diminishing MRT?- Increase in the amount you give up for one good or service for each additional unit you produce of another good or service. This increases opportunity cost as you produce more. (Graph is in notebook)?Bowed Out graph. Why? Some resources are better adapted toward the production of one good or service than another. Slope also becomes a smaller number. Example. (Graph in notebook) Allocative Efficiency DEF: You cannot produce more of one good or service without giving up an amount of the other that you value more. You have to be technically efficient and know something about people?s privileges. The point of allocative efficiency is where the PPF is tangent to the indifference line. Economic Growth DEF: The rise in real per capita income or output. More goods or services per person (Graph in notebook) Factors that shift the PPF (economic growth) Change in Resources Increase in Resources = Increase in PPF Decrease in Resources = Decrease in PPF Change in Technology Increase in Technology = Increase in PPF Decrease in Technology = Decrease in PPF Example- Ice cream and Tables (Graph in notebook) Example- Consumption Goods and Capital Goods (Graph in notebook) Trade DEF: The buying and/or selling of goods or services Trading is a positive sum game. Being a positive sum game means that everyone gains in a trade. (Win-win) Zero Sum Games There is a winner and a loser. Example: Game of Basketball- MSU vs. UofM. One is the winner (+1) and the loser (-1). So it?s a null (0). But Positive sum games are a total of (+2). Two groups with (+1) each. It has to be a mutually advantage trade. Gains from Trade: DEF: It is the increased output that comes from specialization in trade. Comparative Advantage: DEF: Low opportunity cost producer. Law of Comparative Advantage: DEF: Individuals, groups, and nations, will specialization in the production of those goods or services in which they are the low opportunity cost producer and trade for those goods or services in which they are the high opportunity cost producer. (This tells you who is doing what). Numerical Example: Graph in notebook Grandma vs. mom in cookie/soup production Pattern of Trade: Who has the comparative advantage in the production of soup? Opportunity Cost For Grandma Grandma gives up 25 cookies to produce 1 soup. Opportunity Cost For Mom Mom gives up 5 cookies to produce 1 soup. (5 < 25) This shows that Mom has the comparative advantage because she gives up the least cookies to produce 1 soup. Who has the comparative advantage in the production of cookies? Opportunity Cost For Grandma Grandma gives up 1/25 of soup to produce 1 cookie. Opportunity Cost For Mom Mom gives up 1/5 of soup to produce 1 cookie. (1/25 < 1/5) This shows that Grandma has the comparative advantage because she gives up the least amount of soup to produce 1 cookie.
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