Class Summary #21 for 10/21/11

Prof. Rizzo began class today by explaining that trade creates wealth for people.

Although the actual act of trade may not create anything new materially, it does create something: more wealth for people.

A perfect example of this can be gleaned from last class, when Prof. Rizzo explained his baseball card trade when he was a kid. By adding his Kirby Puckett card, more wealth was created because Rizzo obtained a card that gave him a full set (which increased the value of his cards a humongous amount) and the person he traded with received a very valuable card in Kirby Puckett, a card that made him more wealthy materially and monetarily.

This can be connected to the general world. Simply put, trade is the basis that allows the world to get richer/wealthier.

As Prof. Rizzo explained, trade occurs because people don't value certain items as much as other people do. We then talked a little bit about efficiency, which Prof. Rizzo explained in the form of a graph:

Task	Mike	Rich
Weeding	80 mins	120 mins
Mowing	40 mins	120 mins
Total	120 mins	240 mins

In terms of time efficiency, it is clear that Mike is much more efficient than Rich. But, does that mean that Rich can be of help to Mike? Not necessarily. Here is the trade that Prof. Rizzo outlined:

If Rich offers to weed 3/4 of Mike's lawn in exchange for Mike mowing Rich's lawn, then Mike will be mowing for 40 minutes plus 1/4(80) = 40 + 20 = 60 minutes, instead of 120 minutes. Rich will be working 120 mins mowing and 3/4 (120) = 90 minutes, so he  will be working for 210 minutes as opposed to 240 minutes.

Thus, both parties became wealthier by making a trade- wealthier in terms of available time to work on other chores.

Then we learned about Production Possibilities Frontier (PPF), which can be shown on a graph. Here are some facts about it:

1. Absolute Advantage= who can make more.
2. The points on the PPF represent productively efficient data. For the outcome to be efficient, it must represent production of what people want.
3.  On the graph, slope represents the tradeoffs. In other words, it shows how much you need to give up to get something.
4. The change in slope represents the "Law of Diminishing Returns". In other words, when you take away one thing to improve something, you reduce the quality of the other thing.
5. Economic Growth comes from:
1. When more resources are created/found
2. Technology improves to allow us to find/use better and more efficient resources
3. Trade