lecture 5 Flashcards
what is opportunity cost?
the opportunity cost of any activity is the value of the next best activity forgone.
ie its the value to you of what you would have done had you not chosen what you did
what is the net benefit
the net benefit of what you chose to do is your value of that activity minus the opportunity cost
what is explicit costs and implicit costs?
explicit costs $$$$
implicit costs: effort, satisfaction
opportubity cost question: Ed sheeran perform costs $100. You are willing to pay $120 to see Sheeran. You win free ticket to pink concert that you cant sell.
what is opp cost?
a. 0$
b. $20
c. $100
d. $ 120
e. $220
most willing to pay is 120 you only have to pay 100 so net benefit is $20.
what is terms of trade (price)
in the absense of trade a beating panel costs pete 2 painted panels —> hes willing to buy a straight panel at any price less than 2 pains
each panel straightened costs sam only 1 painted panel —-> hes willing to sell a straight panel at any price higher than 1 paint
the terms of trade: 1 straight panel trades for between 1 & 2 painted panels
how else do we exploit the gains from specialisation?
the theory of comparitice advantage was developed to explain trade espcially between countries
why do countries import and export what they do?
and why do rich countries bother trading with poorer countries?
what does nz export and import?
export: goods such as meat, logs of wood, fruit ect ect
import: vehicle parts and accessories. trade with japan and korea they build cars and we give them our stuff
we import tourism ect ect
terms of trade =
the volume of imports that can be funded by a fixed volume of exports
terms of trade =
the volume of imports that can be funded by a fixed volume of exports if this is high we are able to buy more imports with the same amount of exports and this means we get richer
why the big recent rise in the terms of trade?
dairy, meat, wool, forestry prices rose prices rose
what drove the increase in the terms of trade?
export prices jumped 8.3 percent on the back of dairy products, while import prices advanced at a slower 4.8 percent
the 3 tradies join to form a business firm
business firm operates in a competitive marker
each sam: straighten 6 panels a day (12 in total)
pete: paints 12 a day
what does this mean?
they again produce 12 panels finished per day which the results seem the same as when they worked independently as specialist tradesmen…
this can be normal
the importance of ‘transaction costs’
most businesses have both painters and straighteners……..
most likely, working in the same shop is more cost effective. e.g cost of transporting panels is minimised
in a small shops its easy to observe whos good at what scheduling work is easier
less admin/compliance cost
reap the efficiency gains from specialisation without the costs involved in trading
specialisation of labour and capital
specialised labourers usually work with specialised equipment (capital)
improvements in specialised capital (i.e technology)
has hugely increased the productivity of specialised labour.
1900: 50 pin manufactureres in birmingham alone
1939: 12 manufacturers in all of UK
1980: only 2, each with 50 employees (Output per employee - 800,000 & 500,000 pins per day
gains from specialisation as well as gains from technology.
The production function
goods and services are produced with resources
L: labour (time and effort)
K: Physical capital (plant, equipment, expertise
N: Natural resources (materials)
production function: max Q/T = f(L, K, N)
so far we have looked at the gains from specialisation of L
gains that come from variation in worker characteristics, i.e people are better at certain jobs than others.
But specialisation of K has been the economics story of the last 250+ years: the industrial revolution
