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Econ 160

Econ 160. The Economic System of Competition Gains from Specialization & Trade. Review: Definitions. Good : is anything that an individual wants to have more of, at zero price. Resource : Anything that can be used to produce goods.

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Econ 160

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  1. Econ 160 The Economic System of Competition Gains from Specialization & Trade

  2. Review: Definitions Good : is anything that an individual wants to have more of, at zero price. Resource: Anything that can be used to produce goods. Scarcity: A good is scarce if the amount desired at zero price is more than the amount available at zero price.

  3. Review:Assumptions • Humankind has unlimited wants • Our resources are limited • Scarcity: Individually, and as a Society, we do not have enough resources to produce all the things we want.

  4. Review:Implications of Scarcity • Choice: people must choose which goods to acquire. • Economic Cost: The Cost of any action, is the personal value of the next highest valued alternative given-up. • Competition: We are in a state of competition for the use of resources

  5. Forms of Competition in Society • Violence, or Threat of Violence • Social/Political: competition on the basis of some limited behavior or characteristic • Economic/Market: competition based on offering the highest value in exchange.

  6. Scarcity  Society Choices • What to produce? Goal find the mixture of outputs that maximizes society’s value. • How to produce? Goal: find the optimal mix of inputs to maximize technical output. • For whom to produce? Who will get to consume the goods produced.

  7. What Economics Is About • Microeconomics: decisions of individuals and firms: what to buy and what to produce. • Macroeconomics: the whole economic system and the role of government.

  8. Mechanisms of Choice • Political: our representatives make choices • Economic/market: individuals and firms make choices based on relative prices about what to produce

  9. Ten Principles of Economics • Individual decision making • How people interact • The economy as a whole

  10. Individual Decision Making • People Face Trade-offs: Choice • Opportunity Cost • Rational people think at the margins • People respond to incentives

  11. How People Interact • Trade Makes everyone better off • The market system organizes production efficiently • Markets outcomes can sometimes be improved upon by Government

  12. The Economic/Market Form of Competition

  13. Circular Flow Diagram of the Exchange Economy Goods & Services Goods & Services Product Markets $'s $'s Revenue HOUSEHOLDS FIRMS $'s $'s Income Inputs Resources Resource Markets

  14. Economic Agents & Decision-making • Households: Decisions: What to sell? What to buy? Assume Maximize Utility • Firms: Decisions: What inputs to use? What to produce? Assume Maximize Profits. • Markets: Factor Markets, Product Markets Role of Money: The medium of exchange

  15. Definition of Money • Currency in Circulation: Currency outside of Banks in the hands of households,or firms • Checkable deposits in Banks, Savings & Loans, Credit Unions

  16. Interdependence & the Gains from Trade (Chapter 3)

  17. Gains from Specialization &Trade • Production Possibilities • Resource FishCoconuts • Crusoe: 8 or 8 • Friday: 10 or 20

  18. Opportunity Cost in Production Crusoe: 8 F = 8 C 1 F = 1C and 1C = 1F Friday: 10 F = 20 C 1 F = 2C and 1C = ½ F Thus Crusoe has a comparative advantage in the production of fish ( 1F = 1C) and Friday has a comparative advantage in the production of Coconuts ( 1C = ½ F)

  19. Separate Production Possibilities Crusoe Friday Fish Fish 10 8 8 Coco 20 Coco

  20. Pre-Specialization Production • ResourceFishCoconuts • Crusoe: 4 and 4 • Friday: 5 and 10 • Total Output: 9 and 14

  21. Output with Specialization ResourceFishCoconuts • Crusoe: 8 and 0 • Friday: 1 and 18 • Total Output: 9 and 18

  22. Results of Specialization • No increase in Resources • No increase in effort • Increased output by 4 coconuts • Increased output will be shared by the two people or countries so as to make both better off

  23. Apply Reasoning to more than two Resources • Analyze production decisions using several resources with different relative abilities • How to organize production to maximize output • The graphical technique

  24. Graph: Production Possibilities Function Assumptions: 1. Fixed resources: 10 acres in rows. 2. Fixed technology: current knowledge of how to produce. 3. Resources vary in relative productive ability.

  25. Resources and Potential Outputs

  26. Resources and Opportunity Cost

  27. Graph Mechanics • The curve divides the space: interior points possible; Points beyond impossible • Slope: Rise/ Run: The slope reflects the relationship: Negative, more corn means less wheat, more wheat means less corn • Shape: The concave shape reflects increasing cost of production for either good.

  28. Changing assumptions Shifts the Curve • An Increase in resources • Shifts the curve outward • An increase in technology of Wheat production: Effects on Cost • Lowers cost of producing Wheat • Raises the cost of producing corn

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