To begin- Germany and France started the European Union first as a purely economic partnership based on free trade, the European Coal and Steel Community at the end of WWII. To understand why they did this, consider this situation: To produce one ton of steel, it took France 12 days and it took Germany 8 days. To produce (via mining, etc.) one ton of coal, it took France 6 days and Germany 2 days. Figure out who has the absolute advantage, who has the comparative advantage, and what they should trade. (make a chart if it helps)
To begin- One ton is 2000lb
To begin- France OC of Steel: 12/6=2 tons of coal France OC of Coal: 6/12=1/2 tons of steel Germany OC of Steel: 8/2=4 tons of coal Germany OC of Coal: 2/8=1/4 tons of steel AA: Germany has AA in both CA: France has CA in steel while Germany has CA in coal France should trade and specialize in steel and Germany should trade and specialize in coal One ton is 2000lb
Let’s say you are given the production based on Find OCs, AA, and CA
Let’s say you are given the production based on France OCs: 50 light bulbs=2 circuits 1 light bulb=1/25 circuits 1 light bulb costs 1/25th of a circuit 1 circuit=25 light bulbs 1 circuit costs 25 light bulbs Germany OCs: 1 light bulb costs 1 circuit 1 circuits costs 1 light bulb France has AA in light bulbs and Germany has AA in circuits France has CA in light bulbs and Germany has CA in circuits
“Nothing is possible without men; nothing is lasting without institutions” -Monnet, chief architect of the ECSC
The Circular-Flow Model Thecircular-flow modelis a simple way to visually show the economic transactions that occur between households and firms in the economy.
The Circular-Flow DiagramPage 35 in your book…Two versions… Factor=Resource
The Circular-Flow Diagram • The Product Market • Firms sell • Households buy • The Factor Market • Households sell (the factors of production) • Firms buy
The Circular-Flow Diagram Factors of Production • Inputs used to produce goods and services • Land, labor, capital, and entrepreneurial ability… These are the four basic inputs
The Circular-Flow Diagram Where do resource owners get the money to buy good and services in the product market?
INCENTIVES something that causes action or greater effort, as a reward offered for increased productivity… Gets you to do one thing over another Incentives make the economy go round (wages, sales, etc.)
INCENTIVES THE GOLDED RULE OF ECONOMICS People will be incentivized to act until their marginal benefit=marginal cost Economic looks at the differences in incentive structures faced by individuals involved in factor and product markets. This leads to a study of economic systems and marginal analysis…