1Econ 101 M. SalemiComparative AdvantageWeek Two RecitationComparative AdvantageComparative Advantage accounts for the Wealth of NationsThe Principle of Comparative AdvantageComparative Advantage and Production PossibilitiesWhat have we learned?Econ 101 M. SalemiEcon 101 M. SalemiAssignment for Week 2 RecitationRead Chapters 1-4 of The Wealth of Nationsby Adam Smith. There is a pdf copy of the reading on the course web page, www.unc.edu/~salemi.Review the discussion questions for the article also on the web page.Bring copies of the reading and questions to recitation.Come to recitation with preliminary answers to the questions. Expect a quiz. You need not write out your answers.Econ 101 M. SalemiReview: Scarcity PrincipleYour “Reservation Price” is the most you would pay to obtain a good or service.Your “Surplus” in a transaction is the difference between your reservation price and what you actually pay.2Econ 101 M. SalemiUse Your Clickers To Answer The Following Graded QuestionsEcon 101 M. SalemiOn Saturday morning, you have decided to wash, wax, and detail your car. The improvements to your car’s appearance are worth $50 to you. You have decided to do the work yourself because the next best use of your time is working a morning shift at your job for $30. Now a friend suggests a fun outing that will take all morning. Your opportunity cost for that outing is…A. $0B. $20C. $30D. $50Econ 101 M. SalemiI have read the syllabus for Econ 101 Section 8 and agree to abide by the course rules.A. YesB. NoEcon 101 M. SalemiComparative AdvantageIf person A can do either of two tasks in less time than person B, person A will have an “absolute advantage” in both tasks.It is likely, however, that person A will have a comparative advantage in only one task.Who should undertake each task depends on comparative advantage, not on absolute advantage.3Econ 101 M. SalemiComparative AdvantagePerson A has a comparative advantage over Person B if Person A’s opportunity cost of performing a task is lower than Person B’s opportunity cost of performing the same task.Econ 101 M. SalemiComparative AdvantageAri and Sam must write a class report with charts. In one hour…Ari can write 300 words or make 3 charts.Sam can write 200 words or make 1 chart.Who should do each task?200 Words½ChartSam100 Words1 ChartAriCost of One ChartCost of 100 WordsEcon 101 M. SalemiTo the extent possible, Sam should write and Ari should make charts.Sam has a lower opportunity cost for word craft.Sam has a comparative advantage in word craft.Ari has a lower opportunity cost in chart making.Ari has a comparative advantage in chart making.Econ 101 M. SalemiAri has an absolute advantage in chart making and word craft.But…It would be inefficient for Ari to write if Sam is available to write and there are still charts to be made.4Econ 101 M. SalemiComparative AdvantageSuppose the report must include 600 words and two charts and that both must contribute.How much time will it take if…2 + 2 = 4 hoursChartsWrites2/3 + 3 = 3.67 hoursWritesChartsTotal TimeSamAriEcon 101 M. SalemiThe Principle of Comparative AdvantageEveryone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is the lowest.Econ 101 M. SalemiUse Your Clicker To Answer The Following Graded Question.Econ 101 M. SalemiIn one eight hour work day….Sam can: wax 4 cars or wash 12 cars. Ari can: wax 3 cars or wash 6 cars.Which of the following is true? Sam’s cost of washing one car is …A. Greater than Ari’s Cost of washing a car.B. One third of a waxed car.C. Three waxed cars.D. One half of a waxed car.5Econ 101 M. SalemiComparative AdvantageIn one eight hour day…Ari can wax 3 cars or wash 6 cars.Sam can wax 4 cars or wash 12 cars.Who should do each task?1/3 Waxed Car3 Washed CarsSam½Waxed Car2 Washed CarsAriCost of A Washed CarCost of A Waxed CarEcon 101 M. SalemiEcon 101 M. SalemiComparative AdvantageMany corporations willingly provide their CEOs with a personal assistant who accomplishes both business and personal tasks for the CEO.Why do corporations provide personal assistants?Should the shareholders complain?Econ 101 M. SalemiUse Your Clickers To Answer The Following Non-Graded Question6Econ 101 M. SalemiMany corporations provide their CEOs with a personal assistant who accomplishes both business and personal tasks. Which of the following is closest to your view? Shareholders should…A. Oppose the practice because it lowers firm profits and shareholder dividends.B. Oppose the practice but acknowledge that CEOs expect to have a personal assistant.C. Approve the practice because it amounts to tax free compensation for the CEO.D. Approve the practice because it frees the CEO to perform more important tasks. Econ 101 M. SalemiProduction PossibilitiesThe production possibilities graph describes the maximum amount of one good that can be produced for every possible level of production of the other good.The PPF shows that resource scarcity implies that production of any good entails an opportunity cost. Econ 101 M. SalemiProduction PossibilitiesIn 8 hours Ari can write 2400 words or make 24 charts.Sam can write 1600 words or make 8 chart.200 Words½ChartSam100 Words1 ChartAriCost of One ChartCost of 100 WordsEcon 101 M. SalemiProduction Possibilities GraphsAri's PPF036912151821240 3 6 9 1215182124100's of WordsChartsSam's PPF0369121518212403691215182124100's of WordsCharts7Econ 101 M. SalemiJoint Production Possibilities GraphAri and Sam Joint PPF0481216202428320 4 8 1216202428323640100's of WordsChartsAri specializes in charts, Sam splits her time.Sam specializes in words,Ari splits her time.Econ 101 M. SalemiLaw of Increasing CostOptimal Resource AllocationIn expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.Law of Increasing CostAs production of a good expands, the opportunity cost of the good increases.Econ 101 M. SalemiSurvivorsFour survivors are stuck on an island. Each can either fish or gather berries. The following table shows what each survivor can produce in a day.4321Berries(lbs)1234Fish(lbs)JackJerryJoeJeanEcon 101 M. SalemiUse your clicker to answer the following graded question.8Econ 101 M. SalemiWhich survivor should be the first assigned to pick berries?A. Jean B. JoeC. JerryD. Jack4321Berries(lbs)1234Fish(lbs)JackJerryJoeJeanEcon 101 M.