2. 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 IT’S CITIZENS DESIRES OR WANTS EVERYONE ALWAYS WANTS MORE AND THERE IS NOT ENOUGH TO GO AROUND FOR ALL

3. MY PICTURE OF SCARCITY

4. Unlimited needs & wants LimitedResources Choices “Scarcity” Dealing with “Scarcity”

5. THE FOUNDATION OF ECONOMICS SOCIETY HAS VIRTUALLY UNLIMITED WANTS...

6. Land natural resourcesNature’s items“gifts of nature 1. Land [natural resources] – Nature’s items [“gifts of nature”] In the earth A. In the earth - coal, oil, water, fossil fuels, etc. On the earth B. On the earth – vegetation and water In the atmosphere C. In the atmosphere – sun, wind, and rain starting point [Land is the starting point of all production. “Stuff” “Stuff” from which everything is made.. The Four Factors of Production Resources beget production, which beget income, which beget wealth. “ Gifts of Nature ” Water Wind Sun Fossil fuels

7. . Labor human resources“effort” 2. Labor [human resources] {“effort”} “paid work” anyone who works [“paid work”] “brain-power” [Labor is the “brain-power” and “muscle-power” “muscle-power” of human beings] Physical A. Physical – pro athletes & lumberjacks Intellectual B. Intellectual – ministers, doctors & lawyers *Most important resource – 70% of input cost “ Hired Help ”

8. . Real Capital v. Financial Capital FINANCIAL CAPITAL [stocks, bonds, and money] REAL CAPITAL [tools, machinery, & factories] Can produce something directly with these Can’t produce anything directly with these

9. . can be both a consumer good and a capital good A product can be both a consumer good and a capital good –depends on its use. Jet aircraft 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]. F150 pick-up Ex: F150 pick-up to deliver produce [capital good] or take family to church [consumer good] Capital Resources “man-made inputs” 3. Capital Resources – all “man-made inputs” used in the (tools, machinery, and physical plants) production process (tools, machinery, and physical plants). Capital goods A. Capital goods – goods [machinery, buildings, & tools] used to produce other goods produce other goods. [crane, Ford plant, hammer] “future consumption” [products meant for “future consumption”] Consumer goods “immediate consumption” B. Consumer goods – products meant for “immediate consumption”. “man-made inputs”

10. Entrepreneurship starting a new business introducing a new 4. Entrepreneurship – starting a new business or introducing a new product“Sparkplugs” product. “Sparkplugs” who introduce the product or start the new combines land, labor, & capital to produce products business. He combines land, labor, & capital to produce products. Resource paymentsrent Resource payments. The resource owners receive rent [for wagesinterest the use of their land; wages [for their labor]; interest [payment profits for financial capital], and profits [for their entrepreneurial ability]. Rent Wages Interest Profits Land Labor Capital Entrepreneur.

12. MY EXAMPLE

13. 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 GOOD—EXAMPLE THE SUN-FREE DON’T HAVE TO GIVE UP ANYTHING TO GET IT.

14. S carcity Choices Opportunity Costs O pportunity Benefit Opportunity Set [“what is possible for $10,000”] O pportunity Cost

15. Economic Way Of Thinking There is one more highway project & a lot less of many other things. High Five cost $261 million A look at one of the tallest of the High 5 support structures 2 mil. Lbs of concrete, 200,000 lbs of reinforcing steel 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 $11 million T hey received $11 million for finishing early.

16. ACCOUNTANTS VS ECONOMIST ACCOUNTANTS=EXPLICIT COST ONLY EXPLICIT COST-THE SEEN COST ECONOMIST=EXPLICIT + IMPLICIT COST IMPLICIT COST =OPPORTUNITY COST

17. 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 REVENUES=$10 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

18. ANOTHER WAY OF SAYING IT ACOUNTANTS = ALL EXPLICIT COST (DON’T COUNT OPPORTUNITY COST) ECONOMIST= EXPLICIT +IMPLICIT OR EXPLICIT+ OPPORTUNITY COST

19. OC IS GRAPHED AS A PPC CURVE PPC CURVE- PRODUCTION POSSIBILITIES CURVE GUNS VERSUS BUTTER? WHATS THAT? YOU WILL SEE!

20. Production Possibilities Curve [PPC] opportunity costGraphical representation of the opportunity cost of using scarce resources to produce one good [or service] instead of another good [or service]. Consumer Good [iPods] Capital Good [Robots] 10 4 7 5 6 3

21. . 1.S carcity 1.S carcity is represented by the frontier line. Choices 2. Choices - represented by pts A, B. or C. Opportunity Cost 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] Efficiency 4. Efficiency - producing maximum output with available resources and technology. We can’t increase production of one good without decreasing that of another. Economic growth 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] 5 PPC Concepts 5 PPC Concepts

22. Q Q Robots Robots (thousands) Pizzas Pizzas (hundred thousands ) 1413121110 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES

23. Pizzas Industrial Robots Attainable 0 1 2 3 4 5 6 7 8 9 1413121110 9 8 7 6 5 4 3 2 1 Unattainable A B C D E Economic Growth 1.More/better resources 2.Better technology Now Attainable A’ B’ C’ D’ E’ Production Possibilities Curve

24. Q Q Robots Robots (thousands) Pizzas Pizzas (hundred thousands) 14 13 12 11 10 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 U U nemployment & U nderemployment Shown by Point U More of either or both is possible PRODUCTION POSSIBILITIES

25. More or better resources or better technology G CAPITALGOODS unemploymentrecession 40. At what letter is there unemployment [recession]? 41. What letters represent resources being used in their most productive manner most productive manner? [full employment, full production, and best available technology] improvement in technology 42. What letter represents an improvement in technology, new PPC therefore a new PPC frontier line? “law of increasing cost”? 43. The (straight line/curve) illustrates the “law of increasing cost”? “law of constant cost.” 44. The (straight line/curve) illustrates the “law of constant cost.” most economic growth in 45. At what letter would there be the most economic growth in the future the future if a country were producing there now? opportunity cost“C” to “D”; 46. What is the opportunity cost when moving from “C” to “D”; when moving fromE to B when moving from E to B; do we have to give anything upF to D & do we have to give anything up when moving from F to D? F A,B,C,D,E G A Capital Consumer noAB C D E F PPC Consumer Goods

26. PPC Practice Questions fully employing 1. An economy that is fully employing all its productive less to investment than resources but allocating less to investment than to consumption 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 two-commodity PPC for the two-commodity economy shown above? a. Opportunity cost of producing another unit of each stays the same. decreases b. Opportunity cost of producing another unit of each decreases. increases c. Opportunity cost of producing another unit of each increases. true of the PPC 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 watches given up. B to C 4. If we move from B to C on the graph (right), opportunity cost the opportunity cost is? a. AH units of good Y b. OG units of good Y c. EF units of good X d. HG units of good Y B C AHGO

27. PPC P ractice Q uestions [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 Steel Missiles X

28. (89%) opportunity (89%) 3. If two coats are currently being produced, the opportunity cost of producing the third coat cost of producing the third coat is a. 85 belts b. 75 belts c. 40 belts d. 15 belts e. 10 belts (50%) best combination of belts and coatsfor this (50%) 4. The best combination of belts and coats for this economy 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 0 1 2 3 4 100 95 85 40 Belts Coats 70 PPC From the 2005 Macro MC Exam

32. BECAUSE OF SCARCITY SOCIETIES MUST CHOOSE A SYSTEM TO ANSWER 3 QUESTIONS WHAT TO PRODUCE? HOW TO PRODUCE IT? FOR WHOM TO PRODUCE IT?

33. 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.

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

35. Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 Flow 4. Products [Goods/services] Flow 3: C onsumer expenditures

36. Hog CIRCULAR FLOW MODEL BUSINESSES HOUSEHOLDS PRODUCT MARKET Mechanic RESOURCE MARKET 1 2 3 4 Flow 4. Products [Goods/services] Flow 3: C onsumer expenditures Flow 1: L and, L abor, C apital, E ntrepreneur Flow 2: R ent, Wages, Interest, Profits

37. 1 Product Market The Circular-Flow Diagram Businesses Resource Market Households 2 3 Labor What flow are the following? A. Consumer expenditures? B. Goods and services? C. Land, labor, capital, and entrepreneurs? and entrepreneurs? D. Rent, wages, interest, and profits? and profits? 2 1 4 3 4

38. 1 The Circular-Flow Diagram Households Product Market Resource Market 2 3 4 What flow are the following? A. Goods/services? B. Consumer expenditures? C. Land, labor, capital and entrepreneurial ability? entrepreneurial ability? D.Rent, wages, interest, and profits? and profits? Businesses Businesses 4 3 1 2 Labor

39. NS 56-59 product market 56. In the product market (householders/businesses) are the demanderssuppliers demanders and (householders/businesses) are the suppliers. resource market 57. In the resource market (householders/businesses) are the demanders suppliers demanders and (householders/businesses) are the suppliers. resource market 58. In the resource market, (householders/businesses) sell resources sell resources to (householders/businesses). product marketsell 59. In the product market, (householders/businesses) sell products products [goods/services] to (householders/businesses). Fuzzy Wuzzy

40. 4 3 1 2 Outhouse NS 60-63

41. Scarcitychoicesopportunity costs [Scarcity, choices, and opportunity costs are building blocks]. economizing problem 33. The economizing problem is deciding how to make the best use of (limited/unlimited) resources to satisfy (limited/unlimited) wants. Money is not considered an economic resource 34. Money is not considered an economic resource because accumulating money (is/is not) productive. The process of accumulating capital goods tools, machinery, factories capital goods [tools, machinery, and factories) is (depreciation/investment). examples of real capital 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 more of one good can be produced 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. __________________________________________________ opportunity 39. The opportunity (cost/benefit) is the 2 nd best choice. NS 33-39 Land Labor Capital Entrepreneur Land Labor Capital Entrepreneur Rent Wages Interest Profits Any tool, machine, or factory More or better resources; better technology

43. An example of Absolute and Comparative Advantage

44. 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

45. 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-

47. I Can do 8 push-ups. I Can do 42 push-ups, but 102 if you play the Aggie Fight Song. I have an absolute advantage in the production of push-ups. I can clean that house in 4 hours. I’m more efficient. I can do the same work in 3 hours so I have an absolute advantage. T exas L onghorn T exas Aggie

48. AN EXAMPLE OF COMPARATIVE AND ABSOLUTE ADVANTAGE ---------------CarsTacos Usa 10050 Mexico 3090 Absolute advantage in cars- usa Absolute advantage in tacos- mexico Comparative advantage in cars- USA Comparatve tacos MEXICO

49. PRACTIVE COMPARATIVE AND ABSOLUTE ADVANTAGE carstacos Usa2 4 Mexico412 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 Mexico 1/3 of a car

50. MORE PRACTICE carstacos Usa420 Mexico1040 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 ‘ Mexico ¼ CARS NEW INCENTIVE-IF YOU DON’T BRING YOUR PACKETS YOU GET A ZERO FOR THE DAY!!!!!!!!

51. Rule of Hours-everything opposite carstacos Usa4hrs20hrs Mexico10hrs40hrs 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 ‘ Mexico 4 CARS

52. 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] CountryFoodClothing Ducky20 hours 50 hours Ducky 20 hours 50 hours Wucky10 hours20 hours Wucky 10 hours20 hours Ducky a. Ducky has a comparative advantage in the production of both food and clothing. Wucky b. Wucky has a comparative advantage in the production of both food and clothing. Ducky c. Ducky has a comparative advantage in food production, & W ucky W ucky has a comparative advantage in clothing production. Ducky d. Ducky has a comparative advantage in clothing production, Wucky & Wucky has a comparative advantage in food production. e. Neither country has a comparative advantage in the production of either good. 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 Ducky Wucky

53. (59%) Econ2 tons of cocoa or 4 cars (59%) 8. Econ can produce either 2 tons of cocoa or 4 cars with 10 units of labor. Nomics5 tons of cocoa or 25 cars 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 costs costs Econ has a lower op cost for cocoa, 2 cars v. 5 cars. So Econ will produce cocoa. Nomics has a lower op cost for cars, 1/5 cocoa v. 1/2 cocoa. So Nomics will produce cars. costs costs

54. 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

55. 31b Foodclothing G10=.909-1.11 O5-.603-1.9

56. but, a lot of people gain a little. With trade, a few people lose a lot, Free trade is like improved technology [There are some job losses, but many more job gains] [Their jobs] [Lower prices & more choices]

57. Haiti’s DCC Cuba’s DCC 1B = __ C 1B = __ C __ B = 1C __ B = 1C Comparative and Absolute Advantage C omparative A dvantage can produce at a lower productive opportunity cost ] Comparative and Absolute Advantage [ C omparative A dvantage can produce at a lower productive opportunity cost ]4 6 1/4 1/6 100 18 “D o what you do best & trade for the rest.” Absolute Advantage Absolute Advantage - more efficient, can produce more with the same number of inputs [who can produce absolutely more] “ Export ” what it can produce at a lower relative price“ import ” goods it can buy at a lower relative price. “ Export ” what it can produce at a lower relative price and “ import ” goods it can buy at a lower relative price. absolute advantage in coffee 1. (Haiti/Cuba) has an absolute advantage in coffee and (Haiti/Cuba) has an absolute advantage in bread. Haitiexport [ comparative advantage ] import 2. Haiti will export ( bread/coffee ) [ comparative advantage ] & import ( bread/coffee ). [comparative disadvantage] Cuba exportimport [comparative disadvantage] & Cuba will export ( bread/coffee ) & import ( bread/coffee ). Advantageous trade1 bread 3. Advantageous trade can occur between Haiti & Cuba when 1 bread is exchanged for tons of coffee (3/5/7) tons of coffee. Production in both reflects (increasing/constant) opportunity costs. “Trade is the free lunch of economics.” Terms of Trade 1 bread = __ coffees World CC World CC 1 Bread =__ Coffees __ Bread=1 Coffee __ Bread=1 Coffee 5 5 1/5 80 o 20 90 0 15 Haiti Cuba “A prisoner of my own PPC.” Bread Bread Coffee Coffee “I can consume only on my PPC.” 40 10 45 7.5 50 9 costscosts costs costs X 5X 5X 5X 5 X 1/5 PPC is still here But CPC is out here

58. Brazil’s DCCChile’s DCC 1 W = __ S___W = 1S Chilecomparative advantageabsolute advantage 4. Chile has a comparative advantage in (wheat/steel) & an absolute advantage Brazilcomparative advantage in (wheat/steel/both). Brazil has a comparative advantage in (wheat/steel). opportunity cost of one unit of wheat for Chile 5. The opportunity cost of one unit of wheat for Chile is (2/4/6) units of steel. opportunity cost of one unit of steel for Brazil The opportunity cost of one unit of steel for Brazil is (1/2 or ¼ ) wheat. Chileexport 6. If trade occurred, Chile would export (wheat/steel) & import (wheat/steel). Brazilexport Brazil would export (wheat/steel) & import (wheat/steel). 4 2 ¼ ½ 30 4 Terms of Trade 1 W heat = ___ Steels 3 World CC World CC 1 Wheat = __ Steels __ Wheat = 1 Steel __ Wheat = 1 Steel 1/3 3 12 0 3 20 0 10 Brazil Chile Steel Steel Wheat Wheat 6 1.5 10 5 15 2 costs costs

59. DCC for U.S.DCC for Brazil DCC for U.S. DCC for Brazil 1 H = __ B ___H = 1B ___ H = 1B Brazil has a comparative advantage 8. Brazil has a comparative advantage in (bread/ham) and a comparative disadvantage comparative disadvantage in (bread/ham). opportunity cost of producing 1 unit of ham for the U.S. 9. The opportunity cost of producing 1 unit of ham for the U.S. is (10/12/14) breads. terms of trade 10. A cceptable terms of trade might be 1 ham for (8/12/16) breads. 14 1/14 1/10 70 05 40 40HamHam Bread Bread Terms of Trade 1 Ham = __ Bread 10 12 Brazil costs costs

60. FroggyABCDEDCC: FroggyWoggy ABC DEDCC: Woggy Froggy A B C D E DCC: Froggy Woggy A B C D E DCC: Woggy PorkPork Pork (tons) 4 3 2 1 0 1P = __ BPork (tons) 8 6 4 2 0 1P = __ B BeansBeans Beans (tons) 0 5 10 15 20 __ P = 1BBeans (tons) 0 6 12 18 24 __ P = 1B Terms of Trade 1 Pork = __ Beans 15. Production in both countries is subject to (increasing/constant) opportunity cost opportunity cost. comparative advantage 16. If these 2 nations specialize in accordance with comparative advantage, FroggyWoggy Froggy will produce (pork/beans) & Woggy will produce (pork/beans). Froggy1 pork 17. In Froggy, the opportunity cost of 1 pork is (1/5 or 5 or 3) beans’ Froggy produced combo “C” 18. Assume that prior to specialization & trade, Froggy produced combo “C” and Woggy produced “B”comparative Woggy produced “B”. If these 2 nations now specialize according to comparative advantagetotal gains advantage, the total gains will be (4/2/0) tons of beans & (4/2/0) ton(s) of pork. terms of tradeporkbeans 19. Feasible terms of trade would be (1/6/4) ton of pork for (1/6/4) tons of beans. 5 1/5 3 1/3 4 2.5 pork [10x1/4] 8 beans [2x4] After: 8 porks After: 8 porks 8 – 8 = 0 porks 8 – 8 = 0 porks Before: 10 beans 6 beans 6 beans 16 beans 16 beans Before: 2 porks 6 porks 6 porks 8 porks 8 porks After: 20 beans After: 20 beans 10 – 16 = 4 beans 10 – 16 = 4 beans

61. PiggyABCDEDCC: PiggyWiggyABCDEDCC: Wiggy 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 Terms of Trade Terms of Trade 1 Chip = __ Fish 1 Chip = __ Fish absolute advantage in bothfish & chips. 20. (Piggy/Wiggy) has an absolute advantage in both fish & chips.. Wiggyopportunity cost of producing 1 ton of chips 21. For Wiggy, the opportunity cost of producing 1 ton of chips is (1/4/6) tons of fish. Wiggy should specialize import 22. Wiggy should specialize (export) in (fish/chips) and import (fish/chips). Piggychose combo“C” 23. Before specialization and trade Piggy chose combo “C” and Wiggy chose “B” Wiggy chose “B”. gains from trade After specialization, the gains from trade were (20/40/60) tons of fishtons of chips tons of fish and (0/10/20) tons of chips. 4 1/4 6 1/6 5 50 Fish [10x5] 12 chips [60x1/5] Before: 40 fish 180 fish 180 fish 220 fish 220 fish After: 240 fish After: 240 fish 240 – 220 = 20 fish 240 – 220 = 20 fish Before: 10 chips 10 chips 10 chips 20 chips 20 chips After: 20 chips After: 20 chips 20 – 20 = 0 chips 20 – 20 = 0 chips

62. Doggyexport import 24. If trade occurs, Doggy will export (soup/peanuts) and import (soup/peanuts). Woggyexportimport Woggy will export (soup/peanuts) and import (soup/peanuts). Doggyopportunity cost of 1 soup 25. For Doggy, the opportunity cost of 1 soup is (1/2/3) peanuts. Woggyopportunity cost of 1 soup For Woggy, the opportunity cost of 1 soup is (1/2/3) peanuts. Doggy & Woggy chose combination “C”. 26. Prior to specialization, Doggy & Woggy chose combination “C”. comparative advantagegains Now each specializes according to comparative advantage. The gains from tradesouppeanuts from trade will be (0/20/40) units of soup & (0/20/40) units of peanuts. DoggyABC DEDCC: DoggyWoggyDCC: Woggy 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 P eanuts 0 15 30 45 60 Peanuts 0 15 30 45 60 __ S = 1P 1 3 1/3 Terms of Trade Terms of Trade 1 Soup = __ Peanuts 1 Soup = __ Peanuts 2 60 Peanuts [30x2] 15 soups [30x1/2] Before: 30 soups 10 soups 10 soups 40 soups 40 soups After: 60 soups After: 60 soups 60 – 40 = 20 soups 60 – 40 = 20 soups Before: 30 peanuts Before: 30 peanuts 30 peanuts 30 peanuts 60 peanuts 60 peanuts After: 60 peanuts After: 60 peanuts 60 – 60 = 0 peanuts 60 – 60 = 0 peanuts

63. FuzzyA BC D EFDCC: FuzzyWuzzy A BCDEF DCC : Wuzzy 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 Plums 3500 2500 1500 1000 500 0 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 Grapes 0 150 300 450 575 700 Grapes 0 100 200 300 400 500 __ G= 1P Grapes 0 150 300 450 575 700 __ G = 1P Terms of Trade 1 Grape = __ Plums 1/3 5 1/5 1/5 1P C900200 B2500 150 150 Wuzzyopportunity cost of 1 grape 11. In Wuzzy, the opportunity cost of 1 grape is (1/2/3/4/5) plums. Fuzzycomparative advantage 12. Fuzzy has a comparative advantage in & should produce (plums/grapes). terms of trade1 grape 13. The terms of trade will be 1 grape for somewhere between (3 & 5/2 & 6) plums. Fuzzy did not specialize it would producecombo “ C ” and if Wuzzy 14. Assume that if Fuzzy did not specialize it would produce combo “ C ” and if Wuzzy did not specialize it would produce combo “ B ” gains from specialization did not specialize it would produce combo “ B ”. The gains from specialization and trade and trade are: (0/100/150) plums and (0/100/150) grapes. 4 3 1G 3500 The countries of: The countries of: “Fuzzy” and “Wuzzy” “Fuzzy” and “Wuzzy” 500 Before: 900 plums 2500 plums 2500 plums 3400 plums 3400 plums Before: 200 grapes 150 grapes 150 grapes 350 grapes 350 grapes After: 3500 plums After: 3500 plums 3500 – 3400 = 100 plums After: 500 grapes After: 500 grapes 500 – 350 = 150 grapes

64. absolute advantage in both 27. (Djibouti/Canada) has an absolute advantage in both commodities. comparative advantage in producing wheat (Djibouti/Canada) has a comparative advantage in producing wheat. absolute disadvantage in both 28. (Djibouti/Canada) has an absolute disadvantage in both, but a comparative advantage in fish comparative advantage in fish. Advantageous trade 29. Advantageous trade can occur between the two when 1 wheat is exchanged 1 wheat is exchanged for (1/2.5/3) fish. Djibouti DCC: Djibouti Canada DCC: Canada Fish 10 hours 1W = __F Fish 20 hours 1 W = __ F Wheat 20 hours ___ W=1F W hea t 60 hours ___W = 1F Terms of Trade: 1 Wheat = __ Fish 2 1/2 3 1/3 2.52.52.52.5 going to turn inputs into outputs We are going to turn inputs into outputs. 20 hoursDjiboutioutput of 1 wheat or 2 fish In 20 hours, Djibouti can produce an output of 1 wheat or 2 fish. 60 hoursCanadaoutput of 1 wheat or 3 fish In 60 hours, Canada can produce an output of 1 wheat or 3 fish. costs costs

65. [lower # of hours gives absolute advantage] DCC: U.S. Russia DCC: R ussia DCC: U.S. Russia DCC: R ussia Caviar 6 hours 1C = __WCaviar 16 hours 1C = __ W Wheat 3 hours __ C = 1WWheat 4 hours __ C = 1W absolute disadvantage in both commodities 30. (Russia/U.S.) has an absolute disadvantage in both commodities. comparative advantage in wheat (Russia/U.S.) has a comparative advantage in wheat. absolute advantage in both commodities 31. (Russia/U.S) has an absolute advantage in both commodities. comparative advantage in caviar (Russia/U.S.) has a comparative advantage in caviar. Advantageous trade 31. Advantageous trade can occur between the two nations when 1 caviar is exchangedtons of wheat 1 caviar is exchanged for (1/3/5) tons of wheat. 2 1/2 4 1/4 Terms of Trade Terms of Trade 1 Caviar = __ Wheats 1 Caviar = __ Wheats 3 turning inputs into outputs We are once again turning inputs into outputs. 6 hours the U.S.A.output of 1 caviar or 2 wheats In 6 hours, the U.S.A. can produce an output of 1 caviar or 2 wheats. 16 hours R ussia output of 1 caviar or 4 wheats In 16 hours, R ussia can produce an output of 1 caviar or 4 wheats.

66. inputshourssmaller numberabsolute And with inputs (hours), the smaller number indicates absolute advantagemore efficient advantage; that country is more efficient because it can produce absolutely fasterthan the other a good absolutely faster than the other with the same inputs. Absolute Advantage [Outputs v. Inputs] outputsquantitylarger numberabsolute advantage absolutelymore more efficient Absolute Advantage [Outputs v. Inputs] Remember 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.ProductMarket ResourceMarket

67. 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] 2 nd M ost M issed Q uestion On 95 AP E xam [26% correct] CountryFoodClothing Ducky20 hours 50 hours Ducky 20 hours 50 hours Wucky10 hours20 hours Wucky 10 hours20 hours Ducky a. Ducky has a comparative advantage in the production of both food and clothing. Wucky b. Wucky has a comparative advantage in the production of both food and clothing. Ducky c. Ducky has a comparative advantage in food production, & W ucky W ucky has a comparative advantage in clothing production. Ducky d. Ducky has a comparative advantage in clothing production, Wucky & Wucky has a comparative advantage in food production. e. Neither country has a comparative advantage in the production of either good. 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 Ducky Wucky

68. (59%) Econ2 tons of cocoa or 4 cars (59%) 8. Econ can produce either 2 tons of cocoa or 4 cars with 10 units of labor. Nomics5 tons of cocoa or 25 cars 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 costs costs Econ has a lower op cost for cocoa, 2 cars v. 5 cars. So Econ will produce cocoa. Nomics has a lower op cost for cars, 1/5 cocoa v. 1/2 cocoa. So Nomics will produce cars. costs costs

69. Product Market [outputs] Product Market [outputs] Country Guns Butter Rabbit 40 units 120 units Wabbit 20 units 40 units Resource Market [inputs] Resource Market [inputs] Country Guns Butter Rabbit 40 hours 120 hours Wabbit 20 hours 40 hours W hat country has an absolute advantage in guns? W hat 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 ? Rabbit can produce absolutely more guns than Wabbit [40 units v. 20 units] Wabbit can produce guns absolutely faster than Rabbit [20 hours v. 40 hours] Rabbit W hat country has a comparative advantage in guns? W hat country has a comparative advantage in guns? Wabbit Rabbit 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] Rabbit 1 G = 3 B 1/3 G = 1B Wabbit 1 G = 2 B 1/2 G=1B Rabbit 1 B = 3 G 1/3 B = 1G Wabbit 1 B = 2 G 1/2 B = 1G Wabbit Rabbit Wabbit “Let’s change inputs into outputs.” Terms of Trade: 1G = 2.5 B Terms of Trade: 1B = 2.5 G Output v. Input Comparative and Absolute Advantage