Wednesday, May 09, 2007

Free Trade Example Sheet

The example I did in class is available online. I strongly recommend using this when doing your quiz .

This is the link

Note: I remind you on the example, but I will do so again. The example starts from scratch. That is, I give you hours work and then we see what each country (in the example person) can produce. Then I calculate the comparative advantage. On the quiz, however, I already give you the production possibilities. Then I ask you to calculate comparative advantage. Thus I have saved you a step and you can just go right towards solving for who has a comparative advantage in what.

Study Outline for Final

The Following Topics will appear on the final

Supply and Demand
Market Failure (not government failure though)
The 4 market models (PC, Monopoly, Monopolistic Competition, Oligopoly)
Free Trade (in the form of the take home quiz and multiple choice.

All the other topics will not be explicitly tested in multiple choice or part 2 problems. However, you should still have some familiarity with production theory in so much as it is used for the market models (so you can't ignore Marginal Cost, but I won't be asking you to calculate it).

Monday, May 07, 2007

Roger Clemens, Supply and Demand.

If you haven't heard, Roger Clemens has signed with the New York Yankees for a pro-rated $28mn dollars (it works out to about $6.5mn a month). Some may be asking, how is such a salary possible. A modified supply and demand graph can provide an easier answer.

Supply - The market for baseball pitchers is extremely small right now. Word on the street says that potential for a trade is extremely thin due to a lack of talent. About the only player left on the market of any quality is (well, was) Roger Clemens. Thus the supply curve for Clemens was completely inelastic, i.e. vertical. Changes in the price level would not effect the supply curve because there was simply no more talent that could be induced into player for a higher salary.

Demand - However, there was strong demand for a good pitcher. 3 teams were vying for another starting pitcher (The Yankees, Red Sox and Astros). The reaons were unrelated to price and more related to making the playoffs and out competing the competition. Therefore, the demand curve shifted right and the salary Roger Clemens could extract from the market shot up through the roof.

Conclusion: When something is in short supply and the demand for it is increasing, price will increase. It's just simple supply and demand.