International Econ Chapter 6: Proportion Production & Trade

What are specific factors part of in industry?

Manufacturing and Services

What has direct effect on specfifc factors in their industry?

Trade, Tariffs and Subsidies

What is Factor Demand?

A firm will only hire a worker if the MRP( Marginal Revenue Productivity) the value of added product added is larger than the cost of the worker.

What is Diminshing Marginal Production? (MP)

The more you add inputs to a fixed set, the extra output produced gets smaller.

What happens with the price of services increase?

The Marginal Revenue (MRP) of services (S) output increases. Labor moving into the sector rasies production MP of Capital (K) in the sector.

Higher price = more money per sale = higher MR= return on capital

Why does the demand for capital in the service sector increase, and what happens to its return (rₛ)?

Demand for capital rises and its return (rₛ) increases.

Effect on labor MOVE from Services to Manufacturing?

Manufactuirng Marginal Production Decreases—> less money(Rs)—→ less valuable

What happens when demand for services increase?

Firms hire more workers in that sector.

What happens to labor when services become more valuable?

Labor shifts from manufacturing to services.

What happens to capital when labor moves sectors?

Capital in growing sectors becomes more useful, and less useful in shrinking sectors.

What is the main idea of factor abundance?

Countries export what they have a lot of.

In competitive markets, what is MR equal to?

Price (P).

How do Firms Minimize costs?

By choosing the cheapest input are at Marginal Rate of Techinal Substitution MRTS= w/r

What do firms mazimize output?

By combining capital (K) and (L). Swapping or combining will stay constant.

What should a firm do if MR is greater > MC?

Increase outputs; extra money comes from selling one more output

What should a firm do if MR less< MC?

Decrease outputs; Less cost of producing unit.

What are isoquants?

What is an expansion path?

(cheapest) points across isoquants

Wage change → move along isoquant + shift expansion path

How do isoquants relate to profit maximization?

Firms choose the lowest-cost point on an isoquant to maximize profit.

If all these produce 1 unit:

• (1L, 5K) costs $50

• (3L, 2K) costs $30

👉 Firm chooses (3L, 2K) → same output, more profit

This EXAMPLE shows

If all these produce 1 unit:

• (1L, 5K) costs $50

• (3L, 2K) costs $30

👉 Firm chooses (3L, 2K) → same output, more profit

Unit Isoquant

What do tariffs do to factor incomes?

They help one factor earn more and hurt the other.

What does free trade do to factor prices?

Free trade makes factor prices (like wages and returns) more equal across countries.

Explain Trade and Unemployment

Trade policy should not be used to reduce unemployment because unemployment is caused by labor market issues, not trade.

What happens when a factor increases (labor or capital)?

Output of the good using it intensively increases, and the other decreases.

Define Accounting Profit.

Only inlcudes explicit costs

Define Economic Profit

Including costs and opportunity costs