THE PROBLEM ALL SOCIETIES FACE IS UNLIMITED WANTS AND LIMITED RESOURCES. WHICH WE WILL CALL SCARCITY

1
THE PROBLEM ALL SOCIETIES FACE IS UNLIMITED
WANTS AND LIMITED RESOURCES. WHICH WE WILL CALL
SCARCITY

• NO SOCIETY CAN AND WILL HAVE EVER ENOUGH TO
  SATISFY ITS CITIZENS DESIRES OR WANTS
• EVERYONE ALWAYS WANTS MORE AND THERE IS NOT
  ENOUGH TO GO AROUND FOR ALL

2
MY PICTURE OF SCARCITY
3
Limits, Alternatives, Choices Part 2
Dealing with Scarcity
Choices
Limited Resources
Unlimited needs wants
4
THE FOUNDATION OF ECONOMICS
SOCIETY HAS VIRTUALLY UNLIMITED WANTS...
5
.
The Four Factors of Production Resources beget
production, which beget income, which beget
wealth.
1. Land natural resources Natures items
gifts of nature A. In the earth - coal,
oil, water, fossil fuels, etc. B. On the earth
vegetation and water C. In the atmosphere
sun, wind, and rain
Land is the starting point of
all production. Stuff from which everything is
made.
Water
Wind
Gifts of Nature
Fossil fuels
Sun
6
.
2. Labor human resources effort anyone
who works paid work Labor is the
brain-power and muscle-power of human
beings A. Physical pro athletes
lumberjacks B. Intellectual ministers,
doctors lawyers
Most important resource 70 of input cost
Hired Help
7
.
Real Capital v. Financial Capital
REAL CAPITAL tools, machinery, factories
Can produce something directly with these
FINANCIAL CAPITAL stocks, bonds, and money
Cant produce anything directly with these
8
.
3. Capital Resources all man-made inputs used
in the production process (tools, machinery,
and physical plants). A. Capital goods goods
machinery, buildings, tools used to
produce other goods. crane, Ford plant, hammer
products meant for future consumption
B. Consumer goods products meant for immediate
consumption.

• A product can be both a consumer good and a
  capital good depends on its use.
• Ex Jet aircraft used by a movie star like Jim
  Carey
  to visit friends
  (consumer good).
• The same aircraft used by a business manager
  
  to serve customers
  capital good.
• Ex F150 pick-up to deliver produce capital
  good
  or take family to church consumer good

man-made inputs
9
.
Rent Wages Interest Profits Land
Labor Capital Entrepreneur
4. Entrepreneurship starting a new business or
introducing a new product.
Sparkplugs who introduce the product or start
the new business. He combines land,
labor, capital to produce products.
Resource payments. The resource owners receive
rent for the use of their land
wages for their labor interest payment
for financial capital, and profits
for their entrepreneurial ability.
10
(No Transcript)
11
MY EXAMPLE
12
SCARCITY REQUIRES CHOICE ECONOMIST CALL THIS
OPPORTUNITY COST

• WHAT IS YOUR OPPORTUNITY FOR BEING IN THIS CLASS
  RIGHT NOW?
• OC- IS YOUR NEXT BEST ALTERNATIVE
• THERE IS NO SUCH THING AS A FREE LUNCH.
• UNLESS IT IS A FREE GOODEXAMPLE THE SUN-FREE
  DONT HAVE TO GIVE UP ANYTHING TO GET IT.

13
The Opportunity Cost is the "Opportunity Lost"
Opportunity Cost
Opportunity Benefit
Opportunity Set what is possible for 10,000
Choices
Opportunity Costs
Scarcity
14
A look at one of the tallest of the High 5
support structures
High Five cost 261 million
Non-economic Way Of Thinking There is one
more highway project and nothing less of
anything else. Cost twice as much as
any other state transport. project. 500,000 cars
daily They received 11 million for finishing
early.
2 mil. Lbs of concrete, 200,000 lbs of
reinforcing steel
Economic Way Of Thinking There is one
more highway project a lot less of many other
things.
15
ACCOUNTANTS VS ECONOMIST

• ACCOUNTANTSEXPLICIT COST ONLY
• EXPLICIT COST-THE SEEN COST
• ECONOMISTEXPLICIT IMPLICIT COST
• IMPLICIT COST OPPORTUNITY COST

16
AN EXAMPLE OF ACCOUNTANT VERSUS ECONOMIST

• COST OF A LEMONADE STAND
• SUGAR-2
• WATER-1
• LEMONS-5
• OTHER JOB YOU COULD HAVE WOULD PAY YOU 5
• REVENUES10
• ACOUNTANT COST
• 8
• ECONONOMIST COST
• 13
• ACCT WOULD SAY YOU MADE WHAT AMOUNT OF PROFIT?
• 2 PROFIT
• ECONOMIST WOULD SAY YOU LOST HOW MUCH?
• 3

17
ANOTHER WAY OF SAYING IT

• ACOUNTANTS ALL EXPLICIT COST
• (DONT COUNT OPPORTUNITY COST)
• ECONOMIST
• EXPLICIT IMPLICIT
• OR EXPLICIT OPPORTUNITY COST

18
OC IS GRAPHED AS A PPC CURVE

• PPC CURVE- PRODUCTION POSSIBILITIES CURVE
• GUNS VERSUS BUTTER? WHATS THAT? YOU WILL SEE!

19
Production Possibilities Curve PPC
10
7
Capital Good Robots
3
6
4
5
Consumer Good iPods

• Graphical representation of the opportunity cost
  of using scarce resources to produce one good or
  service instead of another good or service.

20
.
5 PPC Concepts

• Scarcity is represented by the frontier line.
• 2. Choices - represented by pts A, B. or C.

3. Opportunity Cost is illustrated in terms of
moving from one point to another when
resources are utilized to their full
potential. must make choices 4. Efficiency -
producing maximum output with available
resources and technology. We cant
increase production of one good
without decreasing that of another.
5. Economic growth occurs for one of two
reasons. A. More resources land, labor,
or capital become available. B. Technology
improves. more outputs from same inputs
21
PRODUCTION POSSIBILITIES
Q
14 13 12 11 10 9 8 7 6 5 4 3 2 1
Unattainable
A
B
W
C
Attainable Efficient
Robots (thousands)
D
Attainable but Inefficient
E
1 2 3 4 5 6
7 8
Pizzas (hundred thousands)
Q
22

• Production Possibilities Curve

• Economic Growth
• More/better resources
• Better technology

A
14 13 12 11 10 9 8 7 6 5 4 3 2 1
B
A
B
C
Unattainable
C
Industrial Robots
D
D
Now Attainable
Attainable
E
E
0 1 2 3 4 5 6 7 8 9
Pizzas
23
PRODUCTION POSSIBILITIES
Unemployment Underemployment Shown by Point U
More of either or both is possible
U
24
A
C A P I T A L G O O D S
B
More or better resources or better technology
G
C
F
D
PPC
E
Consumer Goods
40. At what letter is there unemployment
recession? 41. What letters represent resources
being used in their most productive manner?
full employment, full production, and best
available technology 42. What letter represents
an improvement in technology, therefore a
new PPC frontier line? 43. The (straight
line/curve) illustrates the law of increasing
cost? 44. The (straight line/curve) illustrates
the law of constant cost. 45. At what letter
would there be the most economic growth in
the future if a country were producing there
now? 46. What is the opportunity cost when moving
from C to D when moving from E to B
do we have to
give anything up when moving from F to D?
F
A,B,C,D,E
G
A
Capital
Consumer
no
25
PPC Practice Questions

• 1. An economy that is fully employing all its
  productive
• resources but allocating less to investment
  than
• to consumption will be at which of the
  following
• positions on the PPC to the right?
• a. A b. B c. C d. D e. E
• 2. Which of the following best explains the shape
  of the
• PPC for the two-commodity economy shown
  above?
• a. Opportunity cost of producing another unit
  of each stays the same.
• b. Opportunity cost of producing another unit
  of each decreases.
• c. Opportunity cost of producing another unit
  of each increases.
• 3. Which of the following is true of the PPC on
  the right?
• a. Point Q is attainable but undesirable.
• b. Point R is unattainable but undesirable.
• c. A technological improvement of watches would
  move
• the economy from T to P.
• d. There is unemployment at point T because
  workers
• e. The opportunity cost of moving from S to T
  is the of

A H G O
B
C
26
PPC Practice Questions continued
5. Which of the following would cause the
PPC shown (right) to shift outward? a.
Reopening steel plants that had been closed b.
Rehiring laid-off workers c. Using machinery
for missile production instead of steel
production d. Using machinery for steel
production instead of missile production
e. Developing a more efficient steelmaking
process 6. Base on the graph (right), which
statements are true? I. The opportunity
cost of moving from P to R is 10 units of
Y. II. The opportunity cost of moving from R to
P is 8 units of X. III. The opportunity
cost of moving from Q to R is 0 units.
a. I only b. III only c. I II only d. I,
II, III
Missiles
Steel
X
27
(89) 3. If two coats are currently being
produced, the opportunity cost of
producing the third coat is a. 85 belts b.
75 belts c. 40 belts d. 15 belts e. 10
belts (50) 4. The best combination of belts and
coats for this economy to produce is
a. 95 belts 1 coat b. 85 belts 2 coats
c. 70 belts 3 coats d. 40 belts 4 coats
e. indeterminate with the available information
From the 2005 Macro MC Exam
100
95
85
Belts
PPC
70
40
0 1 2 3 4
Coats
28
(No Transcript)
29
(No Transcript)
30
(No Transcript)
31
BECAUSE OF SCARCITY SOCIETIES MUST CHOOSE A
SYSTEM TO ANSWER 3 QUESTIONS

• WHAT TO PRODUCE?
• HOW TO PRODUCE IT?
• FOR WHOM TO PRODUCE IT?

32
3 TYPES OF ECONOMIES

• TRADITIONAL ECONOMY- Traditions dictate what gets
  produced, who gets it and who will produce it.
• COMMAND ECONOMY-government dictate what gets
  produced, who gets it and who will produce it.
• MARKET ECONOMY- Supply and Demand. The market
  dictate what gets produced, who gets it and who
  will produce it.

33
The Circular Flow

• The Circular Flow is an abstract,
  oversimplified model, showing how economic
  transactions resources, products (g/s), and
  money take place.

34
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET
1
2
Mechanic
Flow 4. Products Goods/services
HOUSEHOLDS
BUSINESSES
Flow 3 Consumer expenditures
3
PRODUCT MARKET
4
35
Hog CIRCULAR FLOW MODEL
RESOURCE MARKET
1
2
Mechanic
Flow 4. Products Goods/services
HOUSEHOLDS
BUSINESSES
Flow 3 Consumer expenditures
Flow 1 Land, Labor, Capital, Entrepreneur
Flow 2 Rent, Wages, Interest, Profits
3
4
PRODUCT MARKET
36
The Circular-Flow Diagram
Product Market
1
2
What flow are the following? A. Consumer
expenditures? B. Goods and services? C. Land,
labor, capital, and entrepreneurs? D.
Rent, wages, interest, and profits?
2
1
4
Businesses
3
Households
Labor
3
4
Resource Market
37
The Circular-Flow Diagram
Resource Market
Labor
1
2

• What flow are the following?
• A. Goods/services?
• B. Consumer expenditures?
• C. Land, labor, capital and
• entrepreneurial ability?
• Rent, wages, interest,
• and profits?

4
3
1
2
Households
Businesses
3
4
Product Market
38
NS 56-59
Fuzzy Wuzzy
56. In the product market (householders/businesses
) are the demanders and (householders/busines
ses) are the suppliers. 57. In the resource
market (householders/businesses) are the
demanders and (householders/businesses) are the
suppliers. 58. In the resource market,
(householders/businesses) sell resources
to (householders/businesses). 59. In the product
market, (householders/businesses) sell
products goods/services to (householders/busines
ses).
39
NS 60-63
Outhouse
4
3
1
2
40
NS 33-39
Scarcity, choices, and opportunity costs are
building blocks. 33. The economizing problem is
deciding how to make the best use of
(limited/unlimited) resources to satisfy
(limited/unlimited) wants. 34. Money is not
considered an economic resource because
money (is/is not) productive. The process of
accumulating capital goods tools,
machinery, and factories) is
(depreciation/investment). 35. Give examples of
real capital. ________________________ 36. The
payments for the 4 factors of production
are 37. The PPC illustrates the principle that
if all resources of an economy are in use,
more of one good can be produced only if
(more/less) of another good is produced. 38. Give
two reasons that could shift the PPC outward.
_________________________________________________
_ 39. The opportunity (cost/benefit) is the 2nd
best choice.
Any tool, machine, or factory
Interest
Rent
Profits
Wages
Land Labor Capital
Entrepreneur
More or better resources better technology
41
Absolute Advantage and Comparative Advantage
42
An example of Absolute and Comparative Advantage
43
Absolute and Comparative Advantage

• Hat 8 1 corn
• 10 hrs for 1 cloth
• 18hours to make both
• Mc
• 15 hrs 1 corn
• 12 hrs to make 1cloth
• 27 hour
• Hat grow two corns16 hour for hat
• MCcoys grow two cloths- 24 hours

44
COMPARATIVE AND ABSOLUTE ADVANTAGE DEFINITIONS

• Absolute advantage- you can just plain out
  produce some one else
• Hatfields had an AA in both corn and cloth.
• Comparative advantage- the one with the lowest
  opportunity cost decides what to produce-

45
Comparative Advantage can produce a product at
a "lower opportunity cost".
Absolute Advantageoutputs can produce
absolutely more with the same inputs. Inputs are
constant as outputs vary
Absolute Advantageinputs can produce
absolutely faster with the same inputs. Outputs
are constant as inputs vary
46
Absolute Advantage outputs can produce
absolutely more with the same inputs more
efficient.
I Can do 42 push-ups, but 102 if you play the
Aggie Fight Song.
I Can do 8 push-ups.
I have an absolute advantage in the
production of push-ups.
Texas Longhorn
Texas Aggie
Absolute Advantage inputs can
produce absolutely faster with the same inputs
more efficient.
Im more efficient. I can do the same work in 3
hours so I have an absolute advantage.
I can clean that house in 4 hours.
47
AN EXAMPLE OF COMPARATIVE AND ABSOLUTE ADVANTAGE

• ---------------Cars Tacos
• Usa 100 50
• Mexico 30 90
• Absolute advantage in cars-
• usa
• Absolute advantage in tacos-
• mexico
• Comparative advantage in cars-
• USA
• Comparatve tacos
• MEXICO

48
PRACTIVE COMPARATIVE AND ABSOLUTE ADVANTAGE

• cars tacos
• Usa 2 4
• Mexico 4 12
• AA Cars
• Mexico
• AA Tacos
• Mexico
• CA Cars
• USA
• CA Tacos
• Mexico
• What does It cost USA to make 1 car?
• 2 tacos
• Mexico
• 3 tacos
• What does it cost USA to make 1 taco
• ½ car

49
MORE PRACTICE

• cars tacos
• Usa 4 20
• Mexico 10 40
• AA C
• MEX
• AAT
• MEX
• CAC
• MEX
• CAT
• USA
• What does It cost USA to make 1 car?
• 5 TACOS
• Mexico
• 4 TACOS
• What does it cost USA to make 1 taco
• 1/5 CARS

50
Rule of Hours-everything opposite

• cars tacos
• Usa 4hrs 20hrs
• Mexico 10hrs 40hrs
• AA C
• usa
• AAT
• usa
• CAC
• usa
• CAT
• mexico
• What does It cost USA to make 1 car?
• 1/5 of a TACO
• What does it cost Mexico to make 1 car?
• 1/4 TACOS
• What does it cost USA to make 1 taco
• 5 CARS

51
2nd Most Missed Question On 95 AP Exam 26
correct
Country Food Clothing Ducky 20
hours 50 hours Wucky 10 hours 20
hours a. Ducky has a comparative advantage in
the production of both food and clothing.
b. Wucky has a comparative advantage in the
production of both food and clothing. c.
Ducky has a comparative advantage in food
production, Wucky has a comparative
advantage in clothing production. d. Ducky has a
comparative advantage in clothing production,
Wucky has a comparative advantage in food
production. e. Neither country has a comparative
advantage in the production of either good.
Ducky
Wucky
Country Food Clothing Ducky 20 hrs
50 hrs 1C 2.5F .4C 1F Wucky 10 hrs
20 hrs 1C 2F .5C 1F
Terms of Trade might be 1C 2.2F
52
From 2005 AP Macro MC Exam
(59) 8. Econ can produce either 2 tons of cocoa
or 4 cars with 10 units of labor. Nomics
can produce either 5 tons of cocoa or 25 cars
with 10 units of labor. Based on this
information, which of the following is true.
a. Econ has an absolute advantage in the
production of cocoa, while Nomics has a
comparative advantage in the production of
cocoa. b. Econ has a comparative advantage in
the production of cocoa, while Nomics has a
comparative advantage in the production of
cars. c. Econ has an absolute advantage in the
production of cocoa, while Nomics has a
comparative advantage in the production of cars.
d. Econ has a comparative disadvantage in the
production of both goods. e. Neither country
has a comparative advantage in the production of
either good. Answer For Econ, 1 cocoa
2 cars so, 1/2
cocoa 1 car For Nomics, 1
cocoa 5 cars
so, 1/5 cocoa 1 car
Econ has a lower op cost for cocoa, 2 cars v. 5
cars. So Econ will produce cocoa.
costs
costs
costs
Nomics has a lower op cost for cars, 1/5 cocoa
v. 1/2 cocoa. So Nomics will produce cars.
costs
53
Ap test do

• ECO-16,1a,1b,1c,
• OC 46, 31a, 16b, 39c,
• PPC-16a, 17a, 46a,17b,32b,46b,13c,26c
• ABSOLUTE AND COMPARATIVE- 1,31B, 38C,
• ESSAY 19E-2
• 31 b and 38c
• Macro-Essay 14E-3 and 16e-3, 18e-2

54

• 31b
• Food clothing
• G 10.90 9-1.11
• O 5-.60 3-1.9

55
COMPARATIVE ADVANTAGE
Their jobs
With trade, a few people lose a lot,
Lower prices more choices
but, a lot of people gain a little.
Free trade is like improved
technology There are some job losses, but
many more job gains
56
Comparative and Absolute AdvantageComparative
Advantage can produce at a lower productive
opportunity cost
Haiti

• Haitis DCC Cubas DCC
• 1B __ C 1B __ C
• __ B 1C __ B 1C

Cuba
100
90
X 1/5
6
costs
costs
4
1/4
1/6
costs
costs
80
But CPC is out here
Terms of Trade 1 bread __coffees
PPC is still here
A prisoner of my own PPC.
I can consume only on my PPC.
5
Coffee
45
50
Coffee
40
World CC 1 Bread__ Coffees __ Bread1
Coffee
5
1/5
10
7.5
9
0
o
18
20
15
X 5
Bread
Bread
Trade is the free lunch of economics.
1. (Haiti/Cuba) has an absolute advantage in
coffee and (Haiti/Cuba) has an absolute
advantage in bread. 2. Haiti will export
(bread/coffee) comparative advantage import
(bread/coffee). comparative disadvantage
Cuba will export (bread/coffee) import
(bread/coffee). 3. Advantageous trade can occur
between Haiti Cuba when 1 bread is exchanged
for (3/5/7) tons of coffee. Production in
both reflects (increasing/constant) opportunity
costs.
Export what it can produce at a lower relative
price and import goods it can buy at a lower
relative price.
Do what you do best trade for the rest.
Absolute Advantage - more efficient, can produce
more with the same number of inputs who can
produce absolutely more
57
Comparative Advantage 2
Brazil
Chile
30
Brazils DCC Chiles DCC 1 W __
S 1 W __ S ___W 1S ___W
1S
2
costs
4
costs
20
¼
½
12
15
Terms of Trade 1 Wheat ___ Steels
10
3
6
Steel
Steel
World CC 1 Wheat __ Steels __ Wheat 1
Steel
5
4
0
1.5
2
3
10
0
Wheat
Wheat
3
1/3
4. Chile has a comparative advantage in
(wheat/steel) an absolute advantage in
(wheat/steel/both). Brazil has a comparative
advantage in (wheat/steel). 5. The opportunity
cost of one unit of wheat for Chile is (2/4/6)
units of steel. The opportunity cost of one
unit of steel for Brazil is (1/2 or ¼ )
wheat. 6. If trade occurred, Chile would export
(wheat/steel) import (wheat/steel). Brazil
would export (wheat/steel) import (wheat/steel).
58
Comparative Advantage 3
DCC for U.S. DCC for Brazil 1 H __
B 1 H __ B ___H 1B ___
H 1B
70
Brazil
40
costs
14
costs
10
1/14
1/10
Bread
Bread
Terms of Trade 1 Ham __ Bread
0
5
12
4
0
Ham
Ham
8. Brazil has a comparative advantage in
(bread/ham) and a comparative disadvantage in
(bread/ham). 9. The opportunity cost of producing
1 unit of ham for the U.S. is (10/12/14)
breads. 10. Acceptable terms of trade might be 1
ham for (8/12/16) breads.
59
Comparative Advantage 5
Froggy A B C D E DCC Froggy
Woggy A B C D E DCC
Woggy Pork(tons) 4 3 2 1 0 1P __
B Pork(tons) 8 6 4 2 0 1P __ B
Beans(tons) 0 5 10 15 20 __ P
1B Beans(tons) 0 6 12 18 24 __ P 1B
2.5 pork 10x1/4
5
3
1/5
1/3
8 beans 2x4
Before 10 beans 6
beans 16 beans
Before 2 porks 6
porks 8 porks
Terms of Trade 1 Pork __ Beans
4
After 8 porks 8 8 0
porks
After 20 beans 10 16 4 beans
15. Production in both countries is subject to
(increasing/constant) opportunity
cost. 16. If these 2 nations specialize in
accordance with comparative advantage,
Froggy will produce (pork/beans) Woggy will
produce (pork/beans). 17. In Froggy, the
opportunity cost of 1 pork is (1/5 or 5 or 3)
beans 18. Assume that prior to specialization
trade, Froggy produced combo C and Woggy
produced B. If these 2 nations now specialize
according to comparative advantage, the total
gains will be (4/2/0) tons of beans (4/2/0)
ton(s) of pork. 19. Feasible terms of trade
would be (1/6/4) ton of pork for (1/6/4) tons of
beans.
60
Comparative Advantage 6
Piggy A B C D E DCC Piggy
Wiggy A B C D E DCC
Wiggy Fish 80 60 40 20 0 1C __ F
Fish 240 180 120 60 0 1C __F Chips 0
5 10 15 20 __ C 1F Chips 0 10
20 30 40 __ C 1F
50 Fish 10x5
4
6
1/4
1/6
12 chips 60x1/5
Terms of Trade 1 Chip
__ Fish
Before 40 fish
180 fish 220 fish
Before 10 chips 10
chips 20 chips
After 240 fish 240 220 20
fish
After 20 chips 20 20 0 chips
5
20. (Piggy/Wiggy) has an absolute advantage in
both fish chips. . 21. For Wiggy, the
opportunity cost of producing 1 ton of chips
is (1/4/6) tons of fish. 22. Wiggy should
specialize (export) in (fish/chips) and import
(fish/chips). 23. Before specialization and
trade Piggy chose combo C and Wiggy
chose B. After specialization, the gains
from trade were (20/40/60) tons of fish
and (0/10/20) tons of chips.
61
Comparative Advantage 7
Doggy A B C D E DCC Doggy Woggy
A B C D E DCC Woggy Soup 60
45 30 15 0 1S __ P Soup 20 15
10 5 0 1S __ P Peanuts 0 15 30 45 60
Peanuts 0 15 30 45 60
__ S 1P
15 soups 30x1/2
1
3
1/3
60 Peanuts 30x2
Before 30 peanuts
30 peanuts 60 peanuts
Before 30 soups
10 soups 40 soups
Terms of Trade 1 Soup __
Peanuts
2
After 60 soups 60 40 20
soups
After 60 peanuts 60 60 0
peanuts
24. If trade occurs, Doggy will export
(soup/peanuts) and import (soup/peanuts).
Woggy will export (soup/peanuts) and import
(soup/peanuts). 25. For Doggy, the opportunity
cost of 1 soup is (1/2/3) peanuts. For
Woggy, the opportunity cost of 1 soup is (1/2/3)
peanuts. 26. Prior to specialization, Doggy
Woggy chose combination C. Now each
specializes according to comparative advantage.
The gains from trade will be (0/20/40)
units of soup (0/20/40) units of peanuts.
62
Comparative Advantage 4
Fuzzy A B C D E F DCC Fuzzy
Wuzzy A B C D E F DCC
Wuzzy Plums 1500 1200 900 600 300 0 1G __ P
Plums 3500 2500 1500 1000 500 0 1G __
P Grapes 0 100 200 300 400 500 __ G 1P
Grapes 0 150 300 450 575 700__ G 1P
The countries of Fuzzy and Wuzzy
B 2500 150
C 900 200
5
1G
3
3500
1/5
1P
1/3
500
Before 900 plums 2500
plums 3400 plums
Before 200 grapes 150
grapes 350 grapes
Terms of Trade 1 Grape __ Plums
4
After 3500 plums 3500 3400 100
plums
After 500 grapes 500 350 150 grapes
11. In Wuzzy, the opportunity cost of 1 grape is
(1/2/3/4/5) plums. 12. Fuzzy has a comparative
advantage in should produce (plums/grapes). 13
. The terms of trade will be 1 grape for
somewhere between (35/26) plums.
14. Assume that if Fuzzy did not specialize it
would produce combo C and if Wuzzy did not
specialize it would produce combo B. The gains
from specialization and trade are
(0/100/150) plums and (0/100/150) grapes.
63
Comparative Advantage 8 (Inputs) lower of
hours gives absolute advantage
Djibouti DCC Djibouti Canada DCC
Canada Fish 10 hours 1W __F Fish 20
hours 1 W __ F Wheat 20 hours ___
W1F Wheat 60 hours ___W 1F
costs
2
3
costs
1/2
1/3
Terms of Trade 1 Wheat __ Fish
2.5
27. (Djibouti/Canada) has an absolute advantage
in both commodities. (Djibouti/Canada) has a
comparative advantage in producing wheat. 28.
(Djibouti/Canada) has an absolute disadvantage in
both, but a comparative advantage in
fish. 29. Advantageous trade can occur between
the two when 1 wheat is exchanged for
(1/2.5/3) fish.
We are going to turn inputs into
outputs. In 20 hours, Djibouti can produce an
output of 1 wheat or 2 fish. In 60 hours, Canada
can produce an output of 1 wheat or 3 fish.
Looking at inputs hours
64
lower of hours gives absolute advantage
Comparative Advantage 9 Inputs
DCC
U.S. Russia DCC Russia Caviar 6 hours
1C __W Caviar 16 hours 1C __
W Wheat 3 hours __ C 1W Wheat 4
hours __ C 1W
4
2
1/2
1/4
Terms of Trade 1 Caviar __ Wheats
3
30. (Russia/U.S.) has an absolute disadvantage in
both commodities. (Russia/U.S.) has a
comparative advantage in wheat. 31. (Russia/U.S)
has an absolute advantage in both commodities.
(Russia/U.S.) has a comparative advantage in
caviar. 31. Advantageous trade can occur between
the two nations when 1 caviar is exchanged
for (1/3/5) tons of wheat.
We are once again turning inputs into
outputs. In 6 hours, the U.S.A. can produce an
output of 1 caviar or 2 wheats. In 16 hours,
Russia can produce an output of 1 caviar or 4
wheats.
65
Absolute Advantage Outputs v.
InputsRemember that with outputs or quantity,
the larger number indicates absolute advantage
that country can produce absolutely more with
the same inputs, and is more efficient.
Product Market
And with inputs (hours), the smaller number
indicates absolute advantage that country is
more efficient because it can produce a good
absolutely faster than the other with the same
inputs.
Resource Market
66
2nd Most Missed Question On 95 AP Exam 26
correct
Country Food Clothing Ducky 20
hours 50 hours Wucky 10 hours 20
hours a. Ducky has a comparative advantage in
the production of both food and clothing.
b. Wucky has a comparative advantage in the
production of both food and clothing. c.
Ducky has a comparative advantage in food
production, Wucky has a comparative
advantage in clothing production. d. Ducky has a
comparative advantage in clothing production,
Wucky has a comparative advantage in food
production. e. Neither country has a comparative
advantage in the production of either good.
Ducky
Wucky
Country Food Clothing Ducky 20 hrs
50 hrs 1C 2.5F .4C 1F Wucky 10 hrs
20 hrs 1C 2F .5C 1F
Terms of Trade might be 1C 2.2F
67
From 2005 AP Macro MC Exam
(59) 8. Econ can produce either 2 tons of cocoa
or 4 cars with 10 units of labor. Nomics
can produce either 5 tons of cocoa or 25 cars
with 10 units of labor. Based on this
information, which of the following is true.
a. Econ has an absolute advantage in the
production of cocoa, while Nomics has a
comparative advantage in the production of
cocoa. b. Econ has a comparative advantage in
the production of cocoa, while Nomics has a
comparative advantage in the production of
cars. c. Econ has an absolute advantage in the
production of cocoa, while Nomics has a
comparative advantage in the production of cars.
d. Econ has a comparative disadvantage in the
production of both goods. e. Neither country
has a comparative advantage in the production of
either good. Answer For Econ, 1 cocoa
2 cars so, 1/2
cocoa 1 car For Nomics, 1
cocoa 5 cars
so, 1/5 cocoa 1 car
Econ has a lower op cost for cocoa, 2 cars v. 5
cars. So Econ will produce cocoa.
costs
costs
costs
Nomics has a lower op cost for cars, 1/5 cocoa
v. 1/2 cocoa. So Nomics will produce cars.
costs
68
Output v. Input Comparative and Absolute Advantage
Rabbit 1 G 3 B 1/3 G1B
Rabbit 1 B 3 G 1/3 B1G
Wabbit 1 B 2 G 1/2 B1G
Wabbit 1 G 2 B 1/2 G1B
Wabbit
Rabbit
Wabbit
Rabbit
Terms of Trade 1G 2.5 B
Terms of Trade 1B 2.5 G
Product Market outputs Country Guns
Butter Rabbit 40 units 120 units Wabbit 20
units 40 units
Resource Market inputs Country Guns
Butter Rabbit 40 hours 120 hours Wabbit 20
hours 40 hours
What country has an absolute advantage in guns?
What country has an absolute advantage in guns?
Rabbit
Wabbit
Why does Rabbit have an absolute advantage
in guns?
Why does Wabbit have an absolute advantage
in guns?
Wabbit can produce guns absolutely faster than
Rabbit 20 hours v. 40 hours
Rabbit can produce absolutely more guns than
Wabbit 40 units v. 20 units
What country has a comparative advantage in guns?
What country has a comparative advantage in guns?
Rabbit
Wabbit
Lets change inputs into outputs.
Wabbit can produce guns at a lower opportunity
cost 2 butters v. 3 butters
Rabbit can produce guns at a lower opportunity
cost 1/3 butter v. 1/2 butter