Appendix to Lecture 2

# Appendix to Lecture 2

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## Appendix to Lecture 2

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##### Presentation Transcript

1. Appendix to Lecture 2 Simplest graphing tools in economic analysis Production possibilities frontier Comparative advantage

2. Simplest graphing tools • Use chalkboard to present: Horizontal axis Vertical axis Point on plane and ordered pair First quadrant Line and line segment (e.g., 2x + 3y = 5 depict it on x-y space) Slope and intercept Rectangular hyperbola

3. Production opportunities of Frank and Robert • Two economic agents • Frank as a farmer; Robert as a rancher • Productivity (fixed rate assumed) measured by time Frank: (need) 60 min to produce 1 ounce (of) meat Frank: 15 min to produce 1 ounce potatoes Robert: 20 min to produce 1 ounce meat Robert: 10 min to produce 1 ounce potatoes Common sense at a glance: who gets the upper hand?

4. Production opportunities (continued) • Question: What should Frank do? • conversion Frank: 60 min to produce 1 ounce (of) meat Frank: 15 min to produce 1 ounce potatoes Robert: 20 min to produce 1 ounce meat Robert: 10 min to produce 1 ounce potatoes Frank: 4 hours for 4 oz meat Frank: 4 hours for 16 oz potatoesnotice 1:4 Robert: 4 hours for 12 oz meat Robert: 4 hours for 24 oz potatoes notice 1:2 Moral (啟示)?

5. Production opportunities (continued) Frank: 4 hours for 4 oz meat Frank: 4 hours for 16 oz potatoesnotice 1:4 Robert: 4 hours for 12 oz meat Robert: 4 hours for 24 oz potatoes notice 1:2 Moral (啟示): comparative advantage: Frank on potato; Robert on meat • Unsaid or unsettled issues: time constraint; demand • Depict PPFs on chalkboard (assumption added: 8 hrs) (注意課本之兩軸)

6. Derive and depict PPFs Frank: 60 min to produce 1 ounce (of) meat Frank: 15 min to produce 1 ounce potatoes (1)(x) + (1/4)(y) = 8 here 1hr per oz of meat (1)(x) + (1/4)(y) < or = 8 Robert: 20 min to produce 1 ounce meat Robert: 10 min to produce 1 ounce potatoes (1/3)(x) + (1/6)(y) = 8 here 1/3hr per oz of meat (1/3)(x) + (1/6)(y) < or = 8

7. Derive and depict PPFs (續) (1)(x) + (1/4)(y) < or = 8 Frank (4)(x) + (1)(y) < or = 32 Points (8, 0) and (0, 32) Slope = -4 or (0 - 32)/(8 - 0) confirmed (1/3)(x) + (1/6)(y) < or = 8 Robert (2)(x) + (1)(y) < or = 48 Points (24, 0) and (0, 48) Slope = -2 flatter

8. Derive and depict PPFs (續) (4)(x) + (1)(y) < or = 32 Slope = -4 For Frank, cut one oz meat, increase 4 oz potatoes For Robert, cut one oz meat, increase 2 oz potatoes (0, 32) from Frank; (24, 0) from Robert (extreme) vs. (8, 0) from Frank; (0, 48) from Robert (extreme) How about (4, 16) and (12, 24)? text autarky without trade; production and consumption (insert figure)

9. Illustrating trade Our story Frank (0, 32) to (5, 17) [import 5 meat; export 15 potatoes] Robert (18, 12) to (13, 27) [export 5 meat; import 15 potatoes] Term of trade 15/5 = 3 Relative price of meat (in terms of potato) Notice slope -3 between -4 and -2! Frank (5, 17) v. (4, 16); Robert (13, 27) v. (12, 24)