He began class by making two graphs that showed how many cameras and bottles of wine the University of Rochester (UR) and Cornell could make if they spent all of its time working on those two endeavors. Here were what the PPF graphs showed:
UR Cornell
Cameras 5 4
Wine 10 3
Based on this data, we can conclude that UR has an absolute advantage in making wine and cameras over Cornell. Because of this, we can say that the reason for this must be that something allows UR to be able to do this better than Cornell, which might that UR has more resources.
Then, we ask ourselves: Which school is more efficient? It's important to note that the ABILITY TO MAKE MORE DOES NOT EQUAL EFFICIENCY. Rather, efficiency in economic terms has to do with opportunity cost. Basically, when we say efficiency, we are asking ourselves:
Who incurs a smaller trade off to produce each item? In other words, who has a smaller opportunity cost by making the given product.
To figure out who's more efficient, we must make another table like above.
UR Cornell
Cameras 5 cameras cost 10 wines 4 cameras cost 3 wines
1 camera= 2 wines 1 camera costs 3/4 wine
PC= 2 wines PC= 3/4 wine
Wine 10 wines cost 5 cameras PC= 4/3 camera
1 wine = 1/2 camera
PW= 1/2 camera
In summary, take wine for example. By making wine, UR is giving up the opportunity to make 1/2 a camera. This is the price/tradeoff of making the wine. This is what needs to be considered when thinking about efficiency.
So, let's ask: Who produces wine at a lower cost? In other words, who is more efficient? We need to compare tradeoffs. UR students are more efficient at making wines because there is less of a price. UR is only giving up 1/2 camera and Cornell is giving up 4/3 cameras.
Therefore, we can say that UR has a "comparative advantage" in making wine over Cornell.
A comparative advantage= the ability to produce something with less of a sacrifice than someone else incurs. In other words, it is a measure of how good you are at producing one thing in comparison to what you lose by producing it. No producer can have a comparative advantage in producing everything.
Then, we need to ask the question: Would it make sense for UR to work with Cornell to produce? Suppose UR decides to just make wine and Cornell decides to just make cameras.
Therefore, we can say that UR has a "comparative advantage" in making wine over Cornell.
A comparative advantage= the ability to produce something with less of a sacrifice than someone else incurs. In other words, it is a measure of how good you are at producing one thing in comparison to what you lose by producing it. No producer can have a comparative advantage in producing everything.
Then, we need to ask the question: Would it make sense for UR to work with Cornell to produce? Suppose UR decides to just make wine and Cornell decides to just make cameras.
UR Cornell
Initially 10 wines, 0 cameras 0 wines, 4 cameras
Final 7 wines, 3 cameras 3 wines, 1 camera
The trade, therefore, is UR trades 3 wines for 3 cameras from Cornell.
The lesson from this is that when you specialize, you stumble upon resources that didn't previously exist. This is a perfect example of economic sustainability: For the same amount of work, we develop more resources.
Some final key notes from class:
- You ALWAYS pay for your imports with exports
- Specializing and engaging in trade leads to more success than does being self-sufficient
- Self-sufficiency is the road to poverty
- What countries/people end up producing is determined by whatever you are better at (more efficient)
- Policies that restrict trade between parties makes people poorer (i.e. tariffs make countries poorer).
- Thus, increasing productivity is key to getting wealthy. Free ability to trade helps people or countries or states improve wealth
No comments:
Post a Comment