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Lecture 3
10/06/2016
1. Log in to Learning Catalytics (session id:15773423 )
2. Comparative Advantage
3. Market Structures
4. Demand Curves
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Administration
• See Karen from Pearson after class today (in Sav 305) if you still
have issues with MEL/LC
2
Constructing a PPF
Layla the economist spends her time giving lectures and writing papers. In one hour she can
either write 3 pages or give 1 lecture. She works 8 hours per day. Draw her PPF for lectures
and pages written.
To make it easy to compare answers, be sure to put her output of lectures on the y-axis.
Lectures
Layla’s PPF
24 Pages written
3
Constructing a PPF
Ted is another economist. In one hour, he can either write 6 pages or give 1 lecture. He also
works 8 hours per day. Draw his PPF.
To make it easy to compare answers, be sure to put her output of lectures on the y-axis.
Lectures
Ted’s PPF
48 Pages written
4
Comparative Advantage
Who has the comparative advantage in giving lectures? In writing? (Hint: You need to
calculate the opportunity cost of each activity for each actor.)
Test yourself – Calculate how many pages Layla would have to give up if she wanted to
give two more lectures in a given day?
5
Considerations
-What goods and services are produced?
Firms/governments/individuals must decide this while considering the
trade-offs and opportunity costs of their choices.
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Types of Economies
Centrally planned economies - Governments decide what to produce,
how to produce it, and who received the goods and services.
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Efficiency of Economies
Market economies promote:
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Caveats About Market Economies
Markets may not result in fully efficient outcomes. For example:
Plus, markets may result in high inequality; some people prefer more
equity, i.e. fairer distribution of economic benefits.
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The Circular-Flow Diagram
Circular-flow diagram: A model that
illustrates how participants in
markets are linked.
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Refer to the graphs below. Each graph represents one
country. Which country should specialize in the production of
chips?
a. Country A
b. Country B
c. Neither country. They both should produce some
chips.
d. Both countries should specialize in the production of
chips.
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Refer to the graphs below. Each graph represents one country. Which
country should specialize in the production of chips?
a. Country A
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What amount of chips can country A consume that will make both countries better
off after specialization and trade? Fill in all of the blanks, but the answer you
submit should be the value for X.
Chips/day Shirts/day
Consumption
Without Trade
Country A 60 60
Country B 28 24
Total 88 84
Consumption With
Specialization & Trade
Country A X ?
Country B 38 34
Total ? ?
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What amount of chips can country A consume that will make both countries
better off?
Chips/day Shirts/day
Consumption
Without Trade
Country A 60 60
Country B 28 24
Total 88 84
Consumption With
Specialization & Trade
Country A 82 74
Country B 38 34
Total 120 108
Gains from
32 24
Trade
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Chapter 3: The Interaction of Demand and Supply
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Demand Schedules and Quantity Demanded
Demand schedule: A table that shows the relationship between the price
of a product and the quantity of the product demanded.
Demand curve: A curve that shows the relationship between the price of a
product and the quantity of the product demanded.
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Demand Curve and Market Demand
Quantity demanded: The amount of a good or service that a consumer (or
market of consumers) is willing and able to purchase at a given price.
Market demand: the demand by all the consumers of a given good or
service.
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Ceteris Paribus
When drawing the demand curve, we assume ceteris
paribus – all variables except price and quantity are
assumed to be held constant.
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The Law of Demand
Law of demand: Holding everything else constant, when the price of a product
falls, the quantity demanded of the product will increase, and vice versa.
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What Explains the Law of Demand?
When the price of a product falls, two effects cause consumers to purchase more of it:
The product has become cheaper relative to other goods, so consumers substitute toward it.
This is the substitution effect.
The consumer now has greater purchasing power, and elects to purchase more goods
overall. This is income effect.
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Increase and Decrease in Demand
A change in something other than
price:
Shift in demand
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Shifts of the Demand Curve
P
1
Q2 Q1 Q3
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Change in Income of consumers
Normal good:
A good for which the demand increases
as income rises, and decreases as
income falls.
Effect of increase in
income, if good is normal
Inferior good:
A good for which the demand decreases
as income rises, and increases as
income falls. Effect of increase in
income, if good is inferior
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Change in the Price of Related Goods
Substitutes:
Goods and services that can be used for
the same purpose.
Complements:
Goods and services that are used
together.
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Change in Demand vs. Change in Quantity
Demanded
A change in the price of the
product causes a movement
along the demand curve.
25
What is achieved when a good or service is produced up to the point where
the marginal benefit to consumers is equal to the marginal cost of producing
it?
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What is achieved when a good or service is produced up to the point where
the marginal benefit to consumers is equal to the marginal cost of producing
it?
Allocative Efficiency
27
Refer to the graph below. The dot represents a point on the
individual’s yearly demand curve for rock concerts. Which of the
following interpretations of the dot on this graph is correct?
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On the graph below, draw the direction of change for the demand curve for concert tickets
when consumers' incomes rise, ceteris paribus. Assume that concert tickets are a normal
good.
($)
Price of Rock Concerts
D1
Quantity of Rock
Concerts
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On the graph below, draw the direction of change for the demand curve for concert tickets
when consumers' incomes rise, ceteris paribus. Assume that concert tickets are a normal
good.
($)
Price of Rock Concerts
D2
D1
Quantity of Rock
Concerts
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