2. Review: What is economics?
✤ The study of how people deal with scarcity
✤ Nothing is available in unlimited quantities
✤ This requires making choices, making trade-offs
✤ Businesses & governments use incentives to influence those choices
✤ Under the classical model, people always make choices rationally
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4. Absolute advantage
“ The producer that requires a smaller quantity of inputs to
produce a good is said to have an absolute advantage in
producing that good.”
– N. Gregory Mankiw,
Principles of Economics
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5. Absolute advantage
“ The producer that requires a smaller quantity of inputs to
produce a good is said to have an absolute advantage in
producing that good.”
– N. Gregory Mankiw,
Principles of Economics
So...a business with an absolute
advantage is just better – more efficient
– at producing that product than
anyone else
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6. Comparative advantage
“ The producer who gives up less of other goods to produce
[a particular good] has the smaller opportunity cost of
producing [that particular good] and is said to have a
comparative advantage in producing it.”
– N. Gregory Mankiw,
Principles of Economics
Monday, 28 January, 13
7. Comparative advantage
“ The producer who gives up less of other goods to produce
[a particular good] has the smaller opportunity cost of
producing [that particular good] and is said to have a
comparative advantage in producing it.”
– N. Gregory Mankiw,
Principles of Economics
So...even a business with an absolute
advantage in making a product might
choose to make something else that
will earn them more money
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8. Comparative advantage: example
Amount of time
required to make: Alice Fred
Surfboard 200 hours 300 hours
Water skis 100 hours 120 hours
Who has the comparative advantage
in making water skis?
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10. Supply &
Demand
✤ Demand is based on the
Price
value consumers attach to Supply
goods & services as well as
their income & substitute
goods Market
Price
✤ Supply is determined by
suppliers’ costs
Demand
✤ The market price is a Quantity
summary of the supply &
demand in the market
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11. Supply &
Demand
✤ Demand is based on the
Price
value consumers attach to Supply
goods & services as well as
their income & substitute New Price
goods
{
Market Add’l
Price Suppliers
✤ Supply is determined by New
Demand
suppliers’ costs
Demand
✤ The market price is a Quantity
summary of the supply &
demand in the market
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12. What kind of product is this?
Price
Supply
Market
Price
Demand
Quantity
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13. What kind of product is this?
Price
Supply
New Price
Market
Price
Demand
Q1 Quantity
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14. What kind of product is this?
Price
Supply
Market
Price
Demand
Q1 Quantity
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15. What kind of product is this?
Price
Supply
Market
Price
New Price
Demand
Q1 Quantity
Q2
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16. Government Policy: Rent control
Price
Supply
Market
Price
Demand
Quantity
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17. Government Policy: Rent control
Price
Supply
Market
Price
Mandated
Price
{ Supply
Gap
Demand
Quantity Quantity Quantity
Supplied Demanded
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18. Writing assignment 1
Eddie Bimonte, a New York City dog
walker, earns around US$50,000 per year.
Registered nurses in New York, with two to
three years of training, make an average of
US$47,742. Your assignment for next week is
to explain, in no more than 500 words, why
you think Eddie makes more money than
the average nurse. Start by thinking like a
journalist: think about what Eddie’s job
actually involves, who his clients are, and
how he does his job. Then try and explain
this situation using the concepts we've
discussed so far in class.
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