Meeting 05

Andrew Pua

2025-01-27

Plan for today

  1. Wrap up production possibilities
  2. Do some exercises
  3. Start working on demand and supply

What is the connection to Chapter 1?

  • If people are permitted to specialize through division of labor and to trade, combined production is larger.

  • Sometimes we say that people specialize based on thier comparative advantage.

  • Specialization and trade allow us to combat scarcity.

  • There are downsides, but the chapters don’t talk about them. You might wonder what if suddenly robots can learn to make sandwiches?

Textbook explanation of the shape of the PPF

  • The textbook offers another explanation for why the PPF at an aggregate level looks like.
  • The book states, “…, the PPF has a curved shape because of the law of the diminishing returns.”
  • Unfortunately, the book does not say much about this law in Chapter 2.
  • But our construction earlier sheds light on what this law could be.

Which bundles to produce on the PPF?

  • Why choose a bundle to produce on the PPF?

  • But there are multiple bundles to choose from. In a similar spirit, preferences play a role.

  • But things are more complicated because how do you “combine” preferences of different people?

  • Two notions of efficiency: productive vs allocative efficiency

Positive vs normative

  • In this course, we try as much as possible to explain what we observe as it is.

    • Then, we are making positive statements.
    • When trade is allowed between two countries, specialization makes the combined production in the world higher than when there was not trade.

  • But there are times where we want to make suggestions about how the world should be.

    • Then, we are making normative statements.
    • We should choose to produce more sandwiches compared to birdhouses because sandwiches are more important for feeding the people.

  • The line between positive and normative can be easily blurred. Typically, it can be hard to disentangle the two types of statements.

Exercises

The point of specialization is that

  1. nations run the risk of embargoes by specializing in the production of only particular goods
  2. a division of labor by comparative advantage raises a nation’s production possibilities
  3. specifalization in the production of particular goods leads to a decline in national income
  4. a nation’s national income can be raised by specializing in its absolute advantage and then trading freely with other countries

Exercises

The shape of a budget line in an economy depends upon

  1. the prices of the resources needed to produce the goods
  2. the degree of fungibility of the goods
  3. the prices (in money) of the goods
  4. the technology for producing the goods

Exercises

Opportunity cost is the result of

  1. unlimited human wants and needs
  2. scarcity
  3. high prices (in money) for some goods and low prices (in money) for others
  4. too many poor people

Question

Keeping mind how much you and your family have, what is the maximum price you are willing to pay for a new 512GB/12GB Titanium Jetblack Samsung S25 Ultra with a 2-year service contract but no trade-in?

  1. 110,000 pesos
  2. 80,000 pesos
  3. 50,000 pesos
  4. 20,000 pesos
  5. I wouldn’t buy one even if it is free.