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Godfrey Okoye University
Department of Economics
ECO 101 Course Syllabus First Semester

2020/2021 Academic Session

Course Information
Course Title:

Principles of Economics I

Course code:

ECO 101

Prerequisites:

None

Instructor Information
Name: Uwakwe Queendaline Chinyere
Rank: Assistant Lecturer
Telephone: 08063197743
Email: quwakwe@gouni
...
ng
Required Course Material
Text: parkins and powel or any other principles of economics textbook
Course Objectives
This course enables students of economics to realize the ancient, classical and current trends and
nature of economics, graphs, branches of the course
...

Course Policies
The final grades will be judged based on attendance, discussions, assignments and exams
Student Assessment and Grading Scale
Assigment
30%
Examination 70%
Total 100%
Grading will be assigned in accordance with university approved grading scale which in general
or on average would reflect the following: A=70-100, B=60-69, C=50-59, D=45-49, F=0-44
Course Outline

1

Nature of Economics
...


5 Graphical and algebraic tools of microeconomics analysis
...

10 Comparative advantage
...
We want a peaceful and secure world
...
We want long and healthy lives
...

We want space and comfort in our homes
...
We want the time to enjoy
sports and games, reading books and magazines, seeing films, listening to music,
travelling and so on
...
Everyone ends up with some unsatisfied
wants
...
These
resources include the gifts of nature, human labour and ingenuity, and tools and
equipment that we have produced
...
The poor and the rich alike face scarcity
...
The scarcity that she faces is clear and disturbing
...
He wants to spend the weekend
playing football and filming an advert, but he can’t do both
...
We want to provide better health care and better education and a cleaner
environment and so on
...
Even parrots face scarcity! Faced
with scarcity, we must choose among the available alternatives
...
David Beckham
must choose the football or the filming
...
The choices that we make depend on
the incentives that we face
...
If heavy rain fills the well, the child in Tanzania has an

incentive to choose more water
...
If computer
prices tumble, we have an incentive as a society to connect more schools to the
Internet
...

The subject divides into two main parts Microeconomics and Macroeconomics
Microeconomics
Microeconomics is the study of the choices that individuals and businesses make,
the way these choices interact in markets and the influence of governments
...
Some examples of macroeconomic questions are: Why did
production and jobs shrink in 2001? Why has Japan’s economy stagnated? Can the
Bank of England bring prosperity by keeping interest rates low? Not only do I
want a cracker—we all want a cracker!

Two Big Economic Questions
Two big questions summarize the scope of economics:
How do the choices that people make end up determining what, how, when, where
and for whom goods and services get produced?
When do choices made in the pursuit of self-interest also promote the social
interest?
What, How, When, Where and For Whom? Goods and services are the objects that
people value and produce to satisfy wants
...
Services are actions performed such as cutting hair and filling teeth
...
And we produce a wide variety of services that
range from dental care to cosmetic surgery
...

Every year, changes in technology allow us to build better equipped homes, more
interesting and useful sporting equipment and deliver a more pleasant experience
in the dentist’s chair
...
By far the largest part of what
people in the rich industrial countries produce today are services such as retail and
wholesale services, health services and education
...
What determines whether we build better
homes or develop better sporting facilities; produce more food or more retail
services? How do these choices change over time? And how are they affected by
the ongoing changes in technology that make an ever-wider array of goods and
services available to us? Economics helps us to answer questions like these about
what we produce
...
You can go to IKEA and buy a factorymade kitchen that you assemble yourself, or you can go to a local carpenter who
will design and make solid wood kitchen units to your personal specification
...
In some shops checkout staff key in prices, in others they use a
laser scanner
...
Goods and
services are produced by using productive resources that economists call factors of
production
...
In
economics, land is what in everyday language we call natural resources
...
Our land surface and water resources are renewable and some of our mineral
resources can be recycled
...

Labour

The work time and work effort that people devote to producing goods and services
is called labour
...
The quality of labour depends on human capital, which is the knowledge
and skill that people obtain from education, on-the-job training and work
experience
...

Capital
The tools, instruments, machines, buildings and other constructions that
businesses now use to produce goods and services are called capital
...
These items are
financial capital
...
Because they are not productive resources, they are
not capital
...
Entrepreneurs come up with new ideas about what and how to
produce, make business decisions and bear the risks that arise from these decisions
...

When?
Sometimes, production slackens off and even shrinks in what is called a recession
...
We call these ebbs and flows of
production the business cycle
...
During the 1990s, production decreased in Central and Eastern Europe as
these countries changed the way they organized their economies
...

Where?
The Kellogg Company, of Battle Creek, Michigan, makes breakfast cereals in 20
countries and sells them in 160
...

Why is there a strong concentration of telecommunications industries in Finland?
Why are financial services concentrated in Frankfurt and London? Economics
helps us to answer questions like these about where goods and services are
produced
...
A large income enables a person to buy large quantities of goods and
services
...
People earn their incomes by selling the services of the factors
of production they own:
1 Land earns rent
...

3 Capital earns interest
...

Labour earns about 70 per cent of total income and this percentage has been
remarkably constant
...
J
...

Rowling earns more than £20 million a year from her Harry Potter series and its
spin-offs, while a petrol station attendant earns only about £5 an hour
...
On average, men earn more than women and
whites earn more than ethnic minorities
...
A typical annual income in the
poorest counties of the world is just a few hundred pounds, less than the equivalent
of a typical weekly wage in the richest countries of the world
...
In Table 1
...
Each level of qualification raises
average income
...
Let’s now examine the second big question
...


Table 1
...
5

Women

35
...
0
11
...
0
26
...
1 billion people in
the rest of the world, make economic choices that result in “What”, “How”,
“Where”, “When” and “For Whom” goods and services get produced
...
You use your time and other
resources in the way that makes most sense to you
...
You order a home delivery pizza
because you’re hungry
...
You make choices that are in your self-interest – choices
that you think are best for you
...
These people have made their
own choices – what to produce and how to produce it, who to hire or who to work
for and so on
...
When the pizza delivery person shows up at your home, he’s not doing you a
favour
...

Economists have been trying to find the answer to this question since 1776, the
year of American independence and the year in which Adam Smith’s monumental
book, The Nature and the Causes of the Wealth of Nations, was published
...
Much of your
economics course helps you to learn what we know about this question
...
You’re already at least a little bit
familiar with each one of them
...
On that day the Berlin Wall tumbled and with its destruction, two
Germanys embarked on a path towards unity
...
In these nations, people own
property and operate businesses
...
All this
economic activity is conducted by people who pursue their own self-interest
...
In such a state, people are not free to operate businesses and trade freely with
each other
...
Economic life is
managed in detail by a government central economic planning agency, and each
individual follows instructions
...
The Soviet Union collapsed soon after the fall of the Berlin Wall and
splintered into a number of independent states, each of which embarked on a
process of privatization
...
Today, only Cuba remains a
communist state, and even there, communism is beginning to crack and
privatization is beginning to creep in
...
Globalization – the expansion of international trade and
investment – has been going on for centuries, but during the 1990s, advances in
microchip, satellite and fibre-optic technologies brought a dramatic fall in the cost
of communication and accelerated the process
...
Every day, 20,000 people travel by air between Europe and
America and another 20,000 between America and East Asia
...
When Nike
decides to increase the production of sports shoes, people who live in China,

Indonesia or Malaysia get more work
...
When Sony wants
to create a new game for PlayStation 2, or when Steven Spielberg wants a movie
animation sequence, programmers in India or New Zealand write the code
...
As part
of the process of globalization, Europe produces more services and fewer
manufactured goods
...
The economies of Asia are also growing more
rapidly than are those of Europe and the United States
...
This rapid economic expansion in Asia will
bring further changes to the global economy as the wealthier Chinese and other
Asians begin to travel and buy more of the goods and services that are produced in
Europe and other parts of the world
...
But globalization is leaving some behind
...
Is globalization a good thing? Who does it benefit?
Globalization is pretty clearly in the interest of the owners of multinational
companies that profit by producing in low-cost regions and selling in high-price
regions
...
Economic revolutions don’t happen very often
...

The revolution before that, the Agrarian Revolution, occurred around 12,000 years
ago and saw the transformation from a life of hunting and gathering to a life of
settled farming
...
But the changes that
occurred during those years were incredible
...
Gordon Moore of Intel
predicted that the number of transistors that could be placed on one integrated chip
would double every 18 months (Moore’s Law)
...
In 1980, a PC chip had 60,000 transistors
...
The spin-offs from faster and cheaper computing were widespread
...
You encounter these
automated tasks everyday when you check out at the supermarket, call directory
assistance, or call a government department or large business
...
They did not
result from any grand design or government economic plan
...
When Bill Gates dropped out of Harvard to set up Microsoft, he
wasn’t trying to create the best operating system and improve people’s computing
experience
...
Yet their actions did make everyone
else better off
...
But could more have been
done? Were resources used in the best possible way during the information
revolution? Did Intel make the best possible chips and sell them in the right
quantities for the right prices? Or was the quality of chips too low and the price too
high? And what about Microsoft? Did Bill Gates have to be paid $30 billion to
produce the successive generations of Windows and Word? Were these programs
developed in the social interest?
The Economic Response to 9–11
The awful events of 11 September, 2001 (commonly called 9–11) created
economic shockwaves that will last for some years and changed “What”, “How”,
“Where”, “When” and “For Whom” goods and services get produced
...
Much
business travel was replaced by teleconferencing
...
Foreign trips were cut back
...
Banks that had
lent money to airlines wrote off millions of euros in losses
...
And airports, although operating at lower capacity, beefed up
their security services
...
Thousands of people made choices in

pursuit of their self-interest that led to these changes in production
...
But today, they are tainted with scandal
...
But its
expansion was built on an elaborate web of lies, deceit and fraud
...
Investigators
uncovered fraud that made millions of dollars for the company’s executives but
that wiped out its shareholders’ wealth
...
In his last year with the company, Sullivan’s salary
was $700,000 and his bonus (in stock options) $10 million
...
Shortly after these events, WorldCom filed for
bankruptcy protection in the largest bankruptcy filing in US history, laid off 17,000
workers and wiped out its stockholders’ wealth
...
Such behaviour is
not in the social interest
...
But some corporate behaviour is legal yet regarded by some as
inappropriate
...
In some cases, executives who have received huge incomes have
brought ruin to the companies that they manage
...
The executives acted in their own selfinterest
...
Didn’t they
suffer? Aren’t these glaring examples of conflict between self-interest and the
social interest?
HIV/AIDS
The World Health Organization and the United Nations estimate that 42 million
people were suffering from HIV/AIDS in 2002
...
Most of the HIV/AIDS cases

– 30 million of them in 2002 – are in Africa, where incomes average around £3 a
day
...
The cost of this treatment is
around £1,200 a year – more than the £3 a day the average person earns
...
And if the activity
were not in the self-interest of the drug companies, they would stop the effort
...
Would it
be in the social interest for drugs to be made available at the low cost of producing
them?
Disappearing Tropical
Rainforests Tropical rainforests in South America, Africa and Asia support the
lives of 30 million species of plants, animals and insects – approaching 50 per cent
of all species on the planet
...
The Amazon rainforest alone converts about 1 trillion pounds of
carbon dioxide into oxygen each year
...
Logging, cattle
ranching, mining, oil extraction, hydroelectric dams and subsistence farming are
destroying the equivalent of two football fields every second
...
Each one of
us makes economic choices that are in our self-interest to consume products, some
of which are destroying this natural resource
...
But 97 per cent
of it is seawater
...
The 1 per cent of
the earth’s water that is available for human consumption would be sufficient if
only it were in the right places
...
Some people pay less for
water than others
...
Some of the highest prices for water are faced by people in the poorest
countries who must either buy water from a water-dealer’s truck or carry water in
buckets over many miles
...
In the United States, public enterprises deliver the water
...
Dams could help, but not enough have been built in those
countries
...
Even today, approaching 40 per cent of teenagers are unemployed in
many countries
...
And people
accept a job when they think the pay and other conditions are good enough
...
But is the number of jobs also in the social interest?
Deficits and Debts
Every year since 1992, Americans have bought goods and services from the rest of
the world in excess of what foreigners bought from them to the tune of $4 trillion
or 40 per cent of a year’s production in the United States
...
These enormous
deficits and the debts they create cannot persist indefinitely and will somehow
have to be repaid
...
But there are areas in which social interest and self-interest come
into conflict
...


The Economic Way of Thinking
The definition of economics and the questions that you’ve just reviewed tell you
about the scope of economics
...
You’re now going to begin
to see how economists approach economic questions
...
This way of thinking needs
practice, but it is powerful and as you become more familiar with it, you’ll begin to
see the world around you with a new and sharp focus
...
And when we make a choice, we
select from the available alternatives
...
You must choose how much time
to devote to each
...
You can think about your choice as a trade-off
...
When you choose how to
spend your weekend, you face a trade-off between studying and going out with
your friends
...
They might actually be guns and butter
...
Or they might be any pair of specific
goods or services such as orange juice and bottled water, footballs and cricket
balls, schools and hospitals, haircuts and career advice
...
The idea of a trade-off is central to the whole of economics
...
What, How and For Whom Trade-offs Each of
the questions what, how and for whom goods and services are produced involves a
trade-off that is similar to that between guns and butter
...
Each of these choices involves a trade-off
...
You go to the pictures this
week, but you forgo a few cups of coffee to buy the ticket
...
The government faces a trade-off when it chooses how to spend our

taxes
...
Businesses face a trade-off when they
decide what to produce
...
Gillette trades off toothbrushes for shavers
...
These choices involve a
trade-off
...

Blockbuster trades off labour for capital
...
Buying power can be redistributed – transferred
from one person to another – in three ways: by voluntary payments, by theft, or
through taxes and benefits organized by government
...
For example, we face a trade-off when we choose
how much to contribute to an Oxfam appeal
...

You trade off your own spending for a small increase in economic equality
...
We trade off goods and services
for an increase in the security of our property
...
Government
redistribution confronts society with what has been called the big trade-off – the
trade-off between equality and efficiency
...
But taxing productive activities such as
running a business, working hard, and saving and investing in capital discourages
these activities
...
A more equal
distribution means there is less to share
...
If each
person receives a share of the pie that reflects the size of her or his effort, everyone
will work hard and the pie will be as large as possible
...
The big trade-off is one between the size of the pie and how
equally it is shared
...

Choices Bring Change

What, how and for whom goods and services are produced changes over time
...
The quantity and range of goods and services available
today in Europe is much greater than that in Africa
...
But the quality of
economic life (and its rate of improvement) doesn’t depend purely on nature and
on luck
...
And these choices involve trade-offs
...
Our saving
can be channeled through the financial system to finance businesses and to pay for
new capital that increases production
...
When you decide to save
an extra £1,000 and forgo a holiday in Spain, you trade off the holiday for a higher
future income
...
As
a society, we trade off current consumption for economic growth and higher future
consumption
...
By becoming better educated and more highly skilled, we become more
productive and are able to produce more goods and services
...
If everyone becomes better educated, production increases and income per
person rises
...
A third choice, usually made by
businesses, is how much effort to devote to research and the development of new
products and production methods
...
More
research brings greater production in the future but means smaller current
production – a trade-off of current production for greater future production
...

Opportunity Cost
The highest-valued alternative that we give up to get something is the opportunity
cost of the activity chosen
...
It expresses the central idea of economics: that every choice
involves a cost
...
If you
drop out and take a job at McDonald’s, you earn enough to buy some CDs, go to

the pictures and spend lots of free time with your friends
...
You will be able to buy these things when
you graduate, and that is one of the payoffs from being in university
...

And doing homework leaves little time to spend with your friends
...
All the what, how and for whom trade-offs that we’ve just
considered involve opportunity cost
...
And the choices that bring change also involve opportunity cost
...

Choosing at the Margin
You can allocate the next hour between studying and e-mailing your friends
...
You must decide how many minutes to allocate to
each activity
...
The benefit that
arises from an increase in an activity is called marginal benefit
...
You decide that you want a higher mark and decide to study an extra
night each week
...
The marginal benefit from
studying for one additional night a week is the 10 point increase in your mark
...
The reason is that you already have the benefit from studying
for four nights a week, so we don’t count this benefit as resulting from the decision
you are now making
...

For you, the marginal cost of increasing your study time by one night a week is the
cost of the additional night not spent with your friends (if that is your best
alternative use of the time)
...
To make your decision, you compare the marginal benefit from
an extra night of study with its marginal cost
...
If the marginal cost exceeds the marginal
benefit, you do not study the extra night
...

Responding to Incentives

Our choices respond to incentives
...
For example, suppose your economics lecturer gives you some homework
and tells you that all the questions will be on the next exam
...
In contrast,
suppose that your maths lecturer sets some homework and tells you that none of
the questions will be on the next exam
...
A central idea of economics is that
we can predict how choices will change by looking at changes in incentives
...
Incentives are also the key to reconciling self-interest and the social
interest
...
One of the challenges for economists is to discover the incentive
systems that result in self-interested choices leading to the social interest
...
All people – consumers, producers, politicians and civil servants – pursue
their self-interest
...
You
might decide to use your resources in ways that bring pleasure to others as well as
to yourself
...
If human nature is given and if people act in their self-interest,
how can we take care of the social interest? Economists answer this question by
emphasizing the crucial role that institutions play in influencing the incentives that
people face as they pursue their self-interest
...
You will learn as you progress with your study of economics that
where these institutions exist, self-interest can indeed promote the social interest
...

2 Provide three everyday examples to illustrate what we mean by choosing at the
margin
...
We test a positive statement by checking it against the facts
...

Statements about what ought to be are called normative statements and they cannot
be tested
...
To see the
distinction between positive and normative statements, consider the following
statements about health care
...
“Every European should have equal
access to health care” is a normative statement
...
This task breaks into three steps:
Observation and measurement
Model building
Testing models
Observation and Measurement
Economists observe and measure data on such things as the quantities of natural
and human resources, wages and work hours, the prices and quantities of the goods
and services, taxes and government spending, and the items bought from and sold
to other countries
...
An economic model is a description of some aspect of the economic
world that includes only those features of the world that are needed for the purpose
at hand
...
What a model includes

and what it leaves out result from assumptions about what is essential and what are
inessential details
...
The weather map is a model that helps to predict the temperature,
wind speed and direction, and rainfall over the next few days
...
It doesn’t show the
motorways because we assume that the pattern of air pressure, not the location of
the motorways, determines the weather
...
For example, an economic model of a mobile phone network will include
items such as the cost of using a mobile phone but it will ignore such details as the
tunes people use for ring tones
...
A model’s predictions may correspond, or be in
conflict, with the facts
...
An economic theory is a
generalization that summarizes what we think we understand about the economic
choices that people make and the performance of industries and entire economies
...
The process of
building and testing models creates theories
...
They have developed this theory by repeated observation and testing of
models
...
It was born in 1776 with the publication of
Adam Smith’s Wealth of Nations
...
But in many areas, economists are still looking for answers
...

Obstacles and Pitfalls in Economics
Economic experiments are difficult to perform and economic behaviour has many
simultaneous causes
...

Unscrambling Cause and Effect
By changing one factor at a time and holding all the other relevant factors
constant, we isolate the factor of interest and investigate its effects in the clearest
possible way
...
Ceteris paribus is a Latin term that means “other

things being equal” or “if all other relevant things remain the same”
...
Economic models
(like the models in all other sciences) enable the influence of one factor at a time to
be isolated in the imaginary world of the model
...
But ceteris paribus can
be a problem in economics when we try to test a model
...
In the nonexperimental sciences such as economics (and astronomy), we usually observe the
outcomes of the simultaneous operation of many factors
...
To cope with this problem, economists take three
complementary approaches
...
Data from different countries might be used, for
example, to study the effects of unemployment benefits on the unemployment rate
...
Third, they perform
experiments
...
Economists try to avoid fallacies – errors of reasoning that
lead to a wrong conclusion
...
They are the:
Fallacy of composition and Post hoc fallacy
Fallacy of Composition: The fallacy of composition is the (false) statement that
what is true of the parts is true of the whole or that what is true of the whole is true
of the parts
...
” If one person stands and the rest remain seated, the statement is true
...
What is true for a part isn’t true for the
whole
...
If all businesses take similar actions, people have less
to spend, businesses sell less and profits don’t improve
...
The post hoc fallacy is the error of reasoning that a
first event causes a second event because the first occurred before the second
...
You observe lots of people

shopping in early December and then you see them opening gifts and partying on
Christmas Day
...
After a deeper
study, you discover that Christmas causes the shopping
...
Unravelling cause and effect is difficult in economics
...
For example, does a stock
market boom cause the economy to expand or does the anticipation of an
expanding economy cause the stock market to boom? To disentangle cause and
effect, economists use economic models and data and, to the extent that they can,
perform experiments
...
qxd 17/11/2004 16:52 Page 15 16 CHAPTER 1
WHAT IS ECONOMICS? Economics is a challenging science and economists
often disagree on issues of theory and on whether the evidence supports or
contradicts theory
...
Disagreement and debate are part of the
way in which science develops new answers to current problems and is the sign of
a healthy science!
Agreement and Disagreement
Economists have a reputation for not agreeing
...
” But actually, while economists like to argue about theory, there is a
remarkable amount of agreement
...
Seventy per cent of economists agree that: Rent ceilings cut the
availability of housing
...
Wage
and price controls do not help slow inflation
...
Sixty per cent of economists agree that: Monopoly power
of big oil companies was not the cause of a rise in the price of petrol during the
Kuwait crisis
...
If the budget is to be balanced, it should be balanced over
a business cycle, not every year
...

Effluent taxes are better than pollution limits
...
Review these statements carefully
...
Disagreements on positive issues
arise when the available evidence is insufficient for a clear conclusion to be
reached
...
Disagreements on

normative issues arise from differences in values or priorities
...
(Think about how
much physicists, chemists and biologists disagree on issues such as global
warming
...
For example, now that you
are aware of the difference between positive and normative statements and the
problems of the fallacy of composition and the post hoc fallacy, you will be on the
lookout to identify these problems in other people’s arguments
...
Ask yourself if the writer has fallen into a fallacy trap when
he or she draws conclusions from evidence
...

Alternatively, if the writer has been careful to consider these problems, you may be
more inclined to accept his or her conclusions
...

2: What is a theory? What is wrong with the statement ‘It might work in theory but
it doesn’t work in practice’? (Hint: Think about what a theory is and how it is
used
...


Time-series Graphs A time-series graph measures time (for example, months or
years) on the x-axis and variables in which we are interested on the y-axis
...
2 is an example of a time-series graph
...
2, we measure time in
years running from 1972 to 2002
...
The point of a time-series graph is to enable us
to visualize how a variable has changed over time and how its value in one period
relates to its value in another period
...
It shows:
1 The level of the price of coffee – when it is high and low
...
When
the line is close to the x-axis, the price is low, as it was, for example, in 1992
...
When the line slopes upward,
as in 1976, the price is rising
...

3 The speed with which the price changes – whether it rises or falls quickly or
slowly
...
If the line is
not steep, the price rises or falls slowly
...
The price fell quickly in 1987 and slowly in 1991
...
A trend is a general
tendency for a variable to move in one direction
...
In Figure A1
...
There
is a very slight upward trend
...
A
time-series graph also helps us to detect cycles in variables
...
2, you
can see some clear cycles in the price of coffee
...

The cycles have troughs in 1981 and 1998, again, almost a ten-year interval
...
Figure A1
...
When we graph data at monthly intervals, we discover seasonal
variations
...
Figure A1
...
This
graph is called a bar chart
...
3 shows the percentage of
young males who participate in various sporting activities
...
And you can do so much more
quickly and clearly than by looking at a list of numbers
...
Figure A1
...
This graph shows the price of coffee (in pence per pound) each year
from 1972 to 2002
...

Scatter Diagrams
A scatter diagram plots the value of one variable against the value of another
variable
...
Figure A1
...
Each dot shows expenditure per person and
income per person in a given year from 1992 to 2003
...
The dot labelled A tells us that in 1997, income per person was
£9,670 and consumption expenditure per person was £9,000
...

Figure A1
...
This graph shows that as the price per minute falls, the
number of calls increases
...
4(c) shows a scatter diagram of inflation and
unemployment in the United Kingdom
...
The dots reveal that there is no simple relationship
between these two variables
...


Ace has a comparative advantage in discs
...
6 Comparative Advantage
...
7(b)
...
So Ace sells
discs to Galaxy for one case per disc, and Galaxy sells cases to Ace for one disc
per case
...
They exchange 6,000 cases and 6,000 discs, and Ace moves to point F and
Galaxy moves to point F'
...
So each now produces 6,000 CDs an hour – double the previous production
rate
...
Both parties to the trade share the gains
...
Ace, which can produce cases at an opportunity
cost of 3 discs per case, can buy cases from Galaxy at a cost of 1 disc per case
...
Ace
has a comparative advantage in discs, and Galaxy has a comparative advantage in
cases
...
If Galaxy
specializes in cases, it produces at point E' on its PPF
...
Galaxy buys discs from Ace for less than its
opportunity cost of producing them, and Ace buys cases from Galaxy for less than
its opportunity cost of producing them
...
Ace and Galaxy increase production with no change in resources
...
So it gets its discs more
cheaply than it can produce them itself
...
So it gets its cases more cheaply than it can produce them itself
...


Gains from Trade in the Global Economy
The gains that we achieve from international trade are also similar to those
achieved by Ace and Galaxy
...
Europeans get
shirts at a lower cost than that at which firms in Europe can produce them, and the
Chinese get their planes at a lower cost than that at which Chinese firms can
produce them
...
Ace can produce the same
quantities of discs as Galaxy can produce cases
...
The gains arise from
comparative advantage and would be available even if one of the trading partners
was much more productive than the other
...

Absolute Advantage
A person has an absolute advantage if that person can produce more goods with a
given amount of resources than another person can
...
A person who has better technology, more
capital, or is more skilled than another person has an absolute advantage
...
The gains from trade arise from
comparative advantage, so people can gain from trade in the presence of absolute
advantage
...
With its new technology, Galaxy can produce 48,000 cases
an hour (4 times the original 12,000) if it puts all its resources into making cases
...
Galaxy now has an absolute advantage
...
And this opportunity cost is
higher than Ace’s
...
In this example, Galaxy will no longer produce only
cases – it will produce some discs as well
...
The key point to recognize is that even though someone (or some
nation) has an absolute advantage, this fact does not destroy comparative
advantage
...
But just by repeatedly
producing a particular good or service, people become more productive in that
activity, a phenomenon called learning-by-doing
...
Dynamic comparative advantage is a comparative
advantage that a person (or a business or a country) possesses as a result of having
specialized in a particular activity and, as a result of learning-by-doing, having
become the producer with the lowest opportunity cost
...
They have developed industries such as biotechnology in which
initially they did not have a comparative advantage but, through learning-by-doing,
became low opportunity cost producers in those industries
...
In economics, a market has a more
general meaning
...
An example is the global
market in oil
...
It is a network of oil producers, users,
wholesalers, brokers and others who buy and sell oil
...
In organized markets, enterprising individuals
and firms, each pursuing their own self-interest, profit from buying or selling the
items in which they specialize
...
Property rights are social arrangements that govern the ownership, use and
disposal of resources, goods, and services
...

This can be explain using circular flows in the market Economy
...
We are going to elaborate it
graphically during the lecture
...
Households choose the quantities
of labour, land, capital, and entrepreneurship to sell or rent to firms in exchange for
wages, rent, interest, and profit
...
Firms choose the

quantities of factors of production to hire and the quantities of the various goods
and services to produce
...
Factors of production and goods flow clockwise
(red), and money payments flow counter clockwise (green)
How Markets Coordinate Choices
Markets coordinate individual decisions through price adjustments
...
A rise in the price of fresh-baked bread
encourages bakers to produce more and encourages some consumers to switch
from fresh-baked bread to packaged bread
...
Similarly, if there is a surplus of
fresh-baked bread, a fall in its price encourages bakers to produce less and
encourages some consumers to switch from packaged bread to fresh-baked bread
...




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