Unit 1 Review

Opportunity Cost Example: 1. The opportunity cost of moving from a to b is… 2 Bikes 2.The opportunity cost of moving from b to d is… 7 Bikes 3.The opportunity cost of moving from d to b is… 4 Computer 4.The opportunity cost of moving from f to c is… 0 Computers 5.What can you say about point G? Unattainable

Constant vs. Increasing Opportunity Cost Identify which product would have a straight line PPC and which would be bowed out? Corn Cactus Wheat Pineapples

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 out 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 5 Copyright ACDC Leadership 2015

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 6 Copyright ACDC Leadership 2015

Trading 1 radio for 2 pineapples will benefit both Radios Kenya 30 10 (1P costs 1/3R) (1R costs 3 P) India 40 (1P costs 1R) 40 (1R costs 1P) Trading 1 radio for 2 pineapples will benefit both If Kenya produces radios by themselves, they give up 3 Pineapples for each radio. If they can trade 2 pineapples for each radio they are better off. If India produces pineapples by themselves, they give up 1 pineapple for one radio. If they can get 2 pineapples for one radio they are better off. The countries trade at a lower opportunity cost than if they made the products themselves! Copyright ACDC Leadership 2015

Change in Qd vs. Change in Demand There are two ways to increase quantity from 10 to 20 Price of Milk P A to B is a change in quantity demand (due to a change in price) A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 Q Milk 10 20 Quantity of Milk

Prices of Related Goods The demand curve for one good can be affected by a change in the price of ANOTHER related good. Substitutes are goods used in place of one another. Ex: If price of Pepsi falls, demand for coke will… If the price of one increases, the demand for the other will increase (or vice versa) 2. Complements are two goods that are bought and used together. Ex: If price of hot dogs falls, demand for hot dog buns will... If the price of one increase, the demand for the other will fall. (or vice versa)

Income The incomes of consumer change the demand, but how depends on the type of good. Normal Goods Ex: Luxury cars, Sea Food, jewelry, homes As income increases, demand increases As income falls, demand falls 2. Inferior Goods Ex: Top Ramen, used cars, used clothes As income increases, demand falls As income falls, demand increases Spam-Inferior Yachts- Normal Off Brand Cereal-Inferior McDonald’s-Inferior Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not)

What Causes a Shift in Demand? 5 Shifters (Determinates) of Demand: Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve.

5 Shifters (Determinants) of Supply Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies 5. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve.

Qe Q1 Demand increases AND supply increases Price S S1 P1 Pe D1 D P indeterminate Q increase Qe Q1 Quantity

Trick: Draw it out separately and combine the results P indeterminate Q increase

Are Price Controls Good or Bad? DEAD WEIGHT LOSS The Lost CS and PS. To be “efficient” a market must maximize consumers and producers surplus P S DEAD WEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS Pc Price CEILING PS D Qceiling Qe Copyright ACDC Leadership 2015 Q

Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus P S CS Price FLOOR DEAD WEIGHT LOSS INEFFICIENT! Not Maximizing CS and PS Pe PS D Qfloor Qe Q