Economics 1/22 & 1/23 Warm Up at your desk! Check your homework first, make necessary changes and then complete the warm up!

PPF & Opportunity Cost Review Because we live in a world of scarcity, we have to make choices. Each choice involves A. Financial costs B. Trade-Offs C. Investments D. Consumption E. Financial Benefits

In the circular flow model, which of the following is true? A. Households are buyers in the product market and sellers in the factor market B. Households are buyers in both the product market and the factor market C. Industry buys in the product market and sells in the factor market D. Industry buys in both the product market and the factor market E. Both households and industry are independent of each other

The production possibility frontier illustrates the following: A. minimum inputs of two factors needed to make one bundle of output B. The best combination of outputs in two goods with one bundle of resources C. The most profitable combination of outputs in two goods with one bundle of resources D. Maximum output in two goods with one bundle of resources E. Maximum consumption possible in an economy

Absolute Advantage and Comparative Advantage Two ways to satisfy wants/needs Economically self-sufficient or to specialize in production of one thing and then trade with others Example #1 Goods: Meat and Potatoes Actors: Cattle rancher and a Potato Farmer QUESTION: When would you trade instead of being self-sufficient? When would you not trade?

Example #1: Meat and Potatoes Facts: Both the farmer and the rancher work 8 hours per day. They can grow potatoes, raise cattle, or both MeatPotatoes Farmer60 min./oz. 15 min./oz. Rancher20 min./oz. 10 min./oz. MeatPotatoes Farmer8 oz.32 oz. Rancher24 oz.48 oz. Minutes Needed to Make One Ounce of: Amount Produced in Eight Hours:

Draw a PPF for each the Farmer and the Rancher MeatPotatoes Farmer8 oz.32 oz. Rancher24 oz.48 oz. Meat (Ounces) Potatoes (ounces) A.Assume that each individual divide their time equally between raising cattle and growing potatoes, graph the points. B.What are the two points that the farmer and the rancher produce (and consume) at?

Specialization & Trade Suppose the rancher suggests that the farmer specialize in the production of potatoes and then trade with the rancher for meat A. The rancher will spend six hours a day producing meat and two hours a WEEK growing potatoes. How much of each will he produce? The farmer will spend eight hours a day growing potatoes. How much of each will he produce? The rancher will trade five ounces of meat for fifteen ounces of potatoes Graph the points of consumption for each the Rancher and the Farmer after the trade

Absolute Advantage and Opportunity Costs Absolute Advantage: the ability to produce a good using fewer inputs than another producer does Who had the absolute advantage in the production of both potatoes and meat? Opportunity Cost: whatever must be given up to obtain some item What were the Opportunity costs for the Rancher? For the Farmer? The opportunity cost of producing one ounce of meat is the inverse of the opportunity cost of producing one ounce of potatoes MeatPotatoes Farmer8 oz.32 oz. Rancher24 oz.48 oz.

Comparative Advantage Comparative Advantage: the ability to produce a good at a lower opportunity cost than another producer Who has the comparative advantage in producing Meat? Potatoes? MeatPotatoes Farmer60 min./oz. 15 min./oz. Rancher20 min./oz. 10 min./oz. It is impossible for a person to have a comparative advantage in the production of both goods because the opportunity cost of producing one good is the inverse of the opportunity cost of producing the other.

Practice! Jay can wash 50 cars or mow 5 lawns in a day while Leah can was 15 cars or mow 3 lawns in one day. Who has the absolute advantage? Who has the comparative advantage of each service? It takes Martha 2 hours to paint a room and 8 hours to wallpaper a room while Stewart can paint a room in 4 hours and wallpaper a room in 10 hours. Who has the comparative advantage of each service?