Unit 1: Basic Economic Concepts

Specialization and Trade Why do people trade? 2

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. 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 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 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

Shows the maximum amount of products a country can produce Output Question: Shows the maximum amount of products a country can produce

Wheat Sugar USA 30 30 Brazil 10 20 Sugar (tons) Wheat (tons) 45 40 35 25 20 15 10 5 10 15 20 25 30 5 10 15 20 Wheat (tons)

Wheat Sugar USA 30 30 Brazil 10 20 (1W costs 1S) (1S costs 1W) 1. Which country has an absolute advantage in producing sugar? 2. Which country has an absolute advantage in producing wheat? 3. Which country has a comparative advantage in producing sugar? 4. Which country has a comparative advantage in producing wheat? 5. Which country should specialize in sugar production? 6. Which country should specialize in wheat production?

International Trade TRADE SHIFTS THE PPC! USA Brazil AFTER TRADE 45 40 35 30 25 20 15 10 5 AFTER TRADE 30 25 20 15 10 5 Sugar (tons) Sugar (tons) AFTER TRADE 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Wheat (tons)

Shows the number of resources required to Input Questions: Shows the number of resources required to produce a specific amount of output Answers: Neither Canada Japan CDs Beef

Number of workers One Car One Bike USA Brazil 4 2 Brazil 5 1 Which country has an absolute advantage in producing cars? 2. Which country has an absolute advantage in producing bikes? 3. Which country has a comparative advantage in producing cars? 4. Which country has a comparative advantage in producing bikes? 5. Which country should specialize in cars production? 6. Which country should specialize in bikes production? USA Brazil USA Brazil USA Brazil

Output: Other goes Over OOO= Output: Other goes Over Answers: Neither Canada Japan CDs Beef

(The variable is resources or time) Input: Other goes Under Input Questions (The variable is resources or time) IOU= Input: Other goes Under Answers Both U.S. (Input Question) France Corn