ECONOMICS why study it?. Social Science Efficiency Scarcity. Economics and Policy. Positive economics (what is going on?) Normative economics (what should be going on?). efficiency. Economic systems and fundamentals of economic efficiency
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
ECONOMICSwhy study it?
[US trade example: BEA (www.bea.gov)]
Consider two economies (A, B), each endowed with 200 worker-hours. Consider that there are only two goods being produced (X, Y). Consider that in country A the hourly wage is $A10, while in country B it is $B20, for simplicity assume that $A=$B. Table below shows costs in each country:
What can be said about the absolute and comparative advantage principles
in this case?
Productivity and trade (education, physical capital…)
Currency and Trade
Output = f (inputs, technology) = TP
TC (Q) = w L + r K
Other inputs can be included (oil, land… furthermore we assume homogeneous labor and capital)
ATC = AVC + AFC
Change in total cost of change in output
Marginal cost as a function of Marginal product of labor (in our simple case)
In equilibrium, a profit maximizing firm will select to produce the level of output at which the wage rate is equal to the value of the marginal product of labor, in other words the marginal cost of a unit of labor (wage) is equal to the marginal benefit of that unit of labor expressed as the change in total revenues.
Consequences of these assumptions:
- Competition along one dimension – the price
- Lack of collusion
- Horizontal demand and MR – price taking behavior
- MC as the supply curve
Shut down and break even price levels – cost diagram in the short-run
Long-run and cost structure of the industry
Industry Demand Increases
Note that MC, ATC, AVC are all functions of input costs (if labor is the only variable input then: MC = wage/MPL, and AVC = wage/APL)
Increasing Cost Industry
Decreasing Cost Industry
Constant Cost Industry
Government role in the economy:
Data for 2001, source: World Bank