(sorry, could not check email last night from home)

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-France Germany

One ton of Steel 12 days 8 days

One ton of Coal 6 days 2 days

One ton is 2000lb

To begin-France Germany

One ton of Steel 12 days 8 days

One ton of Coal 6 days 2 days

France OC of Steel: 12/6=2 tons of coalFrance OC of Coal: 6/12=1/2 tons of steel

Germany OC of Steel: 8/2=4 tons of coalGermany OC of Coal: 2/8=1/4 tons of steel

AA: Germany has AA in bothCA: 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

France Germany

Light bulbs 50 40

Circuits 2 40

Find OCs, AA, and CA

Let’s say you are given the production based on France Germany

Light bulbs 50 40

Circuits 2 40

France OCs:50 light bulbs=2 circuits1 light bulb=1/25 circuits1 light bulb costs 1/25th of a circuit

1 circuit=25 light bulbs1 circuit costs 25 light bulbs

Germany OCs:1 light bulb costs 1 circuit1 circuits costs 1 light bulb

France has AA in light bulbs and Germany has AA in circuitsFrance 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

The circular-flow model is 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 Factor Market Households sell (the factors of production) Firms buy

The Product Market Firms sell Households 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.)

INCENTIVESTHE 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…