ECON 1 Lecture Notes - Lecture 3: Market Power, Demand Curve, Comparative Advantage
4/10/18
- Comparative Advantage: the ability to produce a good at a lower opportunity cost than another
producer
- Which country has the comparative advantage in computers?
o The opportunity cost of a computer is:
o 10 tons of wheat in US (1 computer = 100 labor hours that ould’e produed tos of heat
o 5 tos of hat i Japa oputer = 5 laor hours that ould’e produed 5 tos of heat
o Japan has a comparative advantage in computers
- Gains from trade arise from comparative advantage (difference sin opportunity costs)
- When each country specializes in the good it has a comparative advantage for → total production in all
countries is higher → orld’s eooi pie is igger → all countries gain from trade
- In the PPF, the slope of the line is the opportunity cost (slope = rise/run)
the opportunity cost of 1 computer is 10 tons of wheat
In the example to the right, the opportunity cost of
cloth is lower in England because its PPF is not as
steep as Frae’s
- With additional resources and improvement in technology, the economy can
produce more computers, more wheat, or any combination of any
o Economic growth shifts the PPF outward
- The shape of the PPF
o Can be a straight line OR bow-shaped
o Depends on what happens to the opportunity cost as the economy shifts
resources from one industry to the other
▪ If opportunity cost is constant, PPF is a straight line
▪ If opportunity cost of a good rises as more goods are produced, PPF is bow-shaped
- Ex: Bow-Shaped PPF – As the economy shifts resources from beer to mountain
bikes:
o PPF becomes steeper
o Opportunity cost of mountain bikes increases; the closer the
production point is to beer, the lower the opportunity cost bc the lower
the slope
Economists as Policy Advisor
- As scientists, they make positive statements – attempts to describe the world
as it is
- As policy advisors, they make normative statements – attempt to prescribe how the world should be
- Positive can be confirmed/refuted, normative cannot
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