ECO 2030 1st Edition Lecture 7 Outline of Last Lecture I Absolute and Comparative Advantages Outline of Current Lecture II Calculating Opportunity Cost III Supply and Demand Current Lecture Exam after chapter 6 Calculating opp cost will be on EXAM Absolute value the ability to produce a good using fewer inputs Comparative advantage the ability to produce a good at a lower opportunity cost than another producer This is what most trade agreements are based off of When each country specializes in a the goods in which it has a comparative advantage lower opportunity cost both countries gain Argentina and Brazil Calculating the Opportunity Cost Both have 10 000 hours labor month Argentina Coffee wine Brazil coffee wine units 1lb 1 bottle units 1lb 1 bottle labor hours 2 4 Labor hours 1 5 opp cost wine 2 coffee opp cost wine 5 coffee Argentina has comparative advantage in wine because opp cost is lower Brazil has the comparative advantage in coffee because opp cost is lower the lower number means you lose less therefore you have a lower opp cost each country has to have a comparative advantage one country can not have a comparative advantage in both goods Supply and demand These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute supply does not affect demand and demand does not affect supply they do not depend on each other Demand A Market a group of buyers and sellers of a particular product A Competitive market is one with many buyers and sellers each has a negligible effect of price In a perfectly competitive market All goods are exactly the same Buyers and sellers are so numerous that no one can affect the price Each one is a price taker you done affect price you take what you get In the real world there are very few perfectly competitive markets because there are so many varieties of products e g types of cars ect also there are many goods sold that actually can affect the market price usually when the numbers of firms producing a particular good are small in number Demand the quantity demanded of any good is the amount of the good that buyers are willing and able to purchase Law of Demand the claim that the quantity of a good falls when the price increases demand comes from the behavior of buyers the Demand schedule Can Graph the demand curve Market demand vs individual demand The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price The chart below is an example of one person s demand for lattes to get a market demand you simply add together the quantities of each new individual quantities of lattes demanded Price of Lattes 16 0 00 14 1 00 12 2 00 10 3 00 8 4 00 6 5 00 4 6 00 When the demand increases the curve shifts out for every price there is a greater demand demand more For a decrease in demand the curve moves shifts in or left meaning at every price we demand less Increase in the number of buyers demand increases Fewer buyers demand decreases Income as income increases demand for a normal goods increases For inferior goods ramen noodles fast food ect as income increases demand for these goods decreases Price of relatable goods Substitutable goods pizza and hamburgers or coke and pepsi if the price of Coke increases so
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