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  • At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B.

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B.

Lecturer:

Microeconomics Principles

Recap and Remind

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B.The graph below shows difference between increase at increasing rate and increase at decreasing

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 1At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 2

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 3

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 4

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B.

Economics everyday

Complete table for the graphs

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  1. Graph of labour(L) against output (TP)

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 5

  1. Graph of Labour against marginal product

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 6

  1. The total product and marginal products keep increasing with increase in labour up to a point where an increase in labour does not have an effect on the two variables (TP&MP). Also, the MP keeps increasing at an increasing rate up to a point where it increases at a decreasing rate.

  2. The output for the 2nd and 3rd worker keeps increasing at an increasing rate as shown in the graph above. The result shows that increase in the number of labour increases production efficiency since an extra unit of labour takes up an extra task in the production line thus reducing the number of tasks that the past workers were doing. Therefore, increased in labour results to specialisation where the individual worker does a few task in the production line thus increasing efficiency and number of products produced.

  3. The output between 3rd and 5th worker keeps increasing at a reducing rate due to reduced efficiency of an additional worker.

The increase results in an increased chain of production since workers are specialised on a smaller unit of the task in the organisation. The long chain of production causes increased time taken to pass product from one worker to the next. Also, inefficiency from one person in the chain results to delay in the process. Therefore, increase in a unit of labour result to increase in output at a decreasing rate.

  1. The output between 5th and 6th worker stagnate and reduces when a 7th worker is added. According to the law of marginal diminishing productivity, excess labour units results in no change in output or results to reduced output. The lack of change in output results from overstaffing leading to idle labour and confusion due to duplication of duties. Therefore, an increase of labour does not improve productivity but cause inefficiency due to lack of space.

In conclusion, we can note that marginal product analysis is important in everyday life to keep in check the labour requirement in production since the addition of labour does not necessarily mean an increase in production but sometimes increased cost and inefficiency.

Application and awareness

  1. The PPF of each company

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 7

At point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 8

  1. Comparative and absolute advantage

Opportunity cost

Computer

6 units of shoes

1/6 units of computers

2 units of shoes

1/2 units of computers

The absolute advantage means that a company can produce all products while comparative advantage shows that a company can produce a particular product at a lower opportunity cost than the other (Baier and Bergstrand 72-95). According to the graphs above, Nike has a comparative advantage in producing shoes than IBM since one computer foregone results to the production of 6shoes. On the other hand, one computer foregone results to two shoes created by IBM. Therefore, IBM has an absolute advantage in producing both products since the ability to produce shoes is the same as Nike and stand a better position in producing computers than Nike.

  1. The results above shows that Nike should specialize in the production of shoes since foregoing production of one unit of computer results to production of 6units of shoes which is higher than IBM’s by 4units. IBM should produce computers since they are in better position than Nike since they create extra 6units after using all of its resources.

  2. The terms of trade between the two companies would be for everyone computer produced by IBM, and Nike should produce two shoes. Therefore, the agreeable exchange rate for computers to the shoe would be 1:2.

  1. The consumption possibility frontier curve and gain from trade

NAt point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 9 ike CPF

The specialisation will enable Nike to consume six extra computers due to gain from a trade agreement with IBM.

IAt point A the output increases at an increasing rate. Consequently, Output increases at a decreasing rate in point B. The slope of the graph shows the rate of increase, therefore, at the point A, the slope of the graph is increasing and decreasing at point B. 10 BM CPF

The IBM will not gain or lose anything from a trade agreement to produce only computers since they have the same ability in producing shoes. Therefore, Nike will only gain since IBM has an absolute advantage but the specialisation is beneficial in countering competition since they can produce shoes and computers at a lower cost.

Learning life lessons

  1. Economic rationales of trading bloc

The core reason for the formation of political and economic bloc by countries entails the ability to gain higher bargaining power in the global platform since the countries negotiate as a bloc rather than as an individual country. Also, countries can specialise depending on their comparative advantage to produce a certain product. The specialisation is brought about by removing trade restriction among the bloc members leading to the collapse of inefficient sectors and flourishing of efficient sectors. Therefore, specialisation results to higher productivity and lower cost of production due to large economies of scale. The above reasons form the basis of the formation of the European Union which is one of the biggest trading blocs in the global platform. Therefore, free trade agreement influences a given country regarding trade, immigration, influence, spending and regulation which are the major components of economic performance.

The above reasons lead to the creation of free trade agreement between Australia, China, Japan and South Korea. Australia will stand to benefit from labour mobility since China, and South Korea has higher population thus benefit in the provision of labour force and creation of employment for member countries. On the other hand, Australia, South Korea, and China will benefit from cheap locomotive equipment since Japan has a comparative advantage in producing locomotives. Therefore, the trade agreement protects sectors of the economy that a country has the comparative advantage from unfair competition from non-member countries. Also, the strong economic relationship increases political stability due to increased interaction, uniformity of policies and regulation.

  1. Condition met for gain in a free trade agreement

The gain in free trade model should result in increased consumer and producer surplus emanating from lower or no trade tariffs. Therefore, the effectiveness of free trade to member countries must result to increased specialisation in production i.e. labour, concentration of products with comparative advantage, increased economies of scale and agglomeration effect. Also, increase output possibilities of a given product both for consumption within and outside of the trading bloc. The country with an absolute advantage in producing all products must give up producing some of the product (X) for the country with comparative advantage to produce the product (X).

  1. Votes on UK “Brexit” referendum

The mixed reaction in voting for and against “Brexit” arises from the benefit than an individual draws from the bloc. For example, the producers whose product forms the 45% of the products exported to EU could vote to remain since exit could lead to the imposition of stringent tariffs making them unattractive in EU market. The alternative markets such as China and India are not guaranteed to receive their products. On the other hand, those producers who form 55% of UK exports outside EU bloc would vote for an exit since they don’t benefit from it and revenue is lost through payment of membership fee of £350M only to receive the benefit of £3,000. The expense outweighs benefit drawn from the trading bloc.

Reference:

Baier, Scott L., and Jeffrey H. Bergstrand. «Do free trade agreements actually increase members’ international trade?.» Journal of international Economics 71.1 (2007): 72-95.