Unit I: Basic Economic Concepts

DO NOW Explain how you would use the concept of opportunity cost in everyday life. Differentiate between increasing and constant opportunity cost PPCs Explain why the Law of Increasing Opportunity Cost occurs. Explain how you calculate PER UNIT opportunity cost. Explain difference between productive and allocative efficiency on the PPC

International Trade Why do people trade? 3

Why do people trade? Assume people didn’t trade. What things would you have to go without? Everything you don’t produce yourself! (Clothes, car, cell phone, bananas, heath care, etc) The Point: Everyone specializes in the production of goods and services and trades it to others What would life be like if cities couldn’t trade with cities or states couldn’t trade with states? Limiting trade would reduce people’s choices and make people worse off. The Point: More access to trade means more choices and a higher standard of living. 4

Absolute and Comparative Advantage 5

Per Unit Opportunity Cost 1 hat costs a half of a shirt Per Unit Opportunity Cost Review Per Unit Opportunity Cost = Opportunity Cost Units Gained Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt? $10 per shirt Now, take money our of the equation. Instead of producing 5 shirts you could have made 10 hats. What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up? 1 shirt costs 2 hats What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up? 1 hat costs a half of a shirt 6

Per Unit Opportunity Cost Review Ronald McDonald can produce 20 pizzas or 200 burgers Papa John can produce 100 pizzas or 200 burgers What is Ronald’s opportunity cost for one pizza in terms of burgers given up? What is Ronald’s opportunity cost for one burger in terms of pizza given up? What is Papa John’s opportunity cost for one pizza in terms of burgers given up? What is Papa John’s opportunity cost for one burger in terms of pizza given up? 1 pizza cost 10 burgers 1 burger costs 1/10 pizza 1 pizza costs 2 burgers 1 burger costs 1/2 pizza Ronald has a COMPARATIVE ADVANTGE in the production of burgers Papa John has a COMPARATIVE ADVANTAGE in the production of pizza 7

Absolute and Comparative Advantage Absolute Advantage The producer that can produce the most output OR requires the least amount of inputs (resources) Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20. Comparative Advantage The producer with the lowest opportunity cost. Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost. Countries should trade if they have a relatively lower opportunity cost. They should specialize in the good that is “cheaper” for them to produce. 8

Review! What are the 4 factors of production? Provide an example on how they could work together. What is the difference between Comparative and Absolute Advantage? (Provide an example!!)

Do Now: Define the following terms: Absolute Advantage: Comparative Advantage:

Absolute vs. Comparative Absolute Advantage: means being able to do something using fewer resources than other producers require Comparative Advantage: the worker with the lower opportunity costs should specialize in that product

Watch http://www.investopedia.com/ask/answers/033115/what-difference-between-comparative-advantage-and-absolute-advantage.asp

What is your opportunity cost? In the 45 minutes you take to wash a car, you could instead mow ¾ of the lawn. So your opportunity cost of washing a car is mowing three fourths of the lawn. In the hour that David takes to wash a car, he could instead mow 1/3 of the lawn. So his opportunity cost of washing a car is mowing 1/3 of the lawn.

What’s the comparative advantage?? YOU 45 minutes to wash or ¾ lawn DAVID 60 minutes to wash or 1/3 lawn Who has the comparative advantage for washing and mowing?? David should specialize in wash cars and YOU should specialize in mowing the lawn because you are expending a lower opportunity cost!!

Jay vs. Leah Jay Leah Cars washed 20 15 Lawns mowed 5 3 Assume that Jay and Leah can spend the day either washing cars or mowing lawns. The table below shows how much of each task they could accomplish in one day if they spent the whole day doing just that task. For example, Jay could wash 20 cars or mow 5 lawns in one day. Jay Leah Cars washed 20 15 Lawns mowed 5 3 Calculate the opportunity cost of each activity for each person.

Who has the absolute advantage?? JAY!! Jay has the absolute advantage in both goods. This does not mean that he has comparative advantage. Even though he is “better” at producing both goods than Leah, he can still benefit from trading with her.

Jay’s Opportunity Costs The opportunity cost of mowing 5 lawns is washing 20 cars. the opportunity cost of mowing 1 lawn is washing 4 cars. the opportunity cost of washing 1 car is mowing ¼ of a lawn.

Leah’s Opportunity Costs The opportunity cost of mowing 3 lawns is washing 15 cars. the opportunity cost of mowing 1 lawn is washing 5 cars. the opportunity cost of washing 1 car is mowing 1/5 of a lawn.

Who has the comparative advantage for CARS? LEAH! Leah has a lower opportunity cost for washing cars so she has the comparative advantage in cars (she gives up only 1/5 of a lawn per car while Jay gives up ¼ of a lawn).

Who has the comparative advantage for LAWNS? JAY! Jay has a lower opportunity cost for mowing lawns so he has the comparative advantage in lawns (he gives up only 4 cars per lawn while Leah gives up 5 cars).

Who should specialize?? Jay should specialize in mowing lawns and Leah should specialize in washing cars.