What did you study last time

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(No Transcript)
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What did you study last time?

• Chapter 2Thinking like Economists
• I. Some additional economic concepts
• II. Two basic economic modelsAppendix Graphs
  basic mathematics in introductory Economics

Any questions?
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What do you study now?

• Chapter 3Interdependence gains from trade
• A parable for the modern economy
• The principle of comparative advantage
• Applications of comparative advantage

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Start-of-ClassPractice Quiz 1
Practice Quiz 2
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Do you know

• a story about a cattle rancher and a potato
  farmer?
• how to determine who has an edge in the
  production of a good or service?
• who should produce the good or service?
• who should specialize in what?

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Do you know

• why people countries trade?
• how people countries trade?
• what happens when people countries trade?

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I. A parable for the modern economy

• Assume that in the world there is a simple
  economy with
• Two people a cattle rancher and a potato farmer,
  and
• Two goods meat and potatoes

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I. A parable for the modern economy

• The table below describes the production
  opportunities of the farmer and the rancher

Minutes Needed toMake 1 Ounce of
Amount Produced in 8 Hours
Meat
Potatoes
Meat
Potatoes
Farmer
60 min
15 min
8 oz
32 oz
Rancher
20 min
10 min
24 oz
48 oz
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I. A parable for the modern economy

• Without trade, the situation is as follows

Farmer
Rancher
Meat
Potatoes
Meat
Potatoes
Production Consumption
4 oz
16 oz
12 oz
24 oz
PPF CPF
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I. A parable for the modern economy

• Let us draw the production possibilities
  frontiers for the farmer and the rancher, based
  upon the given data.
• Denote N as the no-trade combinations, P as the
  production combinations, and T as the after-trade
  combinations.

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Production Possibilities Frontiers (PPFs)
Meat (oz)
The farmers PPF with no-trade combination N.
The ranchers PPF with no-trade combination N.
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N
12
8
N
4
Potatoes (oz)
O
48
32
16
24
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I. A parable for the modern economy

• With trade, the situation becomes

Farmer
Rancher
Meat
Potatoes
Meat
Potatoes
Production
0 oz
32 oz
18 oz
12 oz
Trade
Gets 5 oz
Gives 15 oz
Gives 5 oz
Gets 15 oz
Consumption
5 oz
17 oz
13 oz
27 oz
Gains from trade Increase in Consumption
1 oz
1 oz
1 oz
3 oz
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Production Possibilities Frontiers (PPFs)
Meat (oz)
No-trade production consumption combinations
With-trade production combinations
After-trade consumption combinations
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P
Farmers PPF
N
T
12
Ranchers PPF
8
N
T
4
P
Potatoes (oz)
O
48
32
16
24
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I. A parable for the modern economy

• The moral of the story
• By specializing in something that each of them
  does best and trading with one another, both the
  farmer and the rancher get to have more meat and
  potatoes to enjoy.

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II. The principle of comparative advantage

• Who has an edge (the absolute advantageAA) in
  the production of a good or service?
• That is the producer
• who is more productive compared to others, i.e.
• who can produce the good or service using fewer
  inputs than others.

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II. The principle of comparative advantage

• Who has the absolute advantage in the production
  of meat?
• The rancher.
• Who has the absolute advantage in the production
  of potatoes?
• The rancher.

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II. The principle of comparative advantage

• Why?
• The rancher can produce more of both goods than
  the farmer in 8 hours.

Amount Produced in 8 Hours
Meat
Potatoes
Farmer
8 oz
32 oz
Rancher
24 oz
48 oz
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II. The principle of comparative advantage

• Who produces the good or service at a lower cost?
  (or who has the comparative advantageCA in the
  production of a good or service?)
• That is the producer
• who is more efficient than others
• who produces the good or service with lower
  (opportunity) costs compared to others.

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II. The principle of comparative advantage

• Who has the comparative advantage in the
  production of meat?
• The rancher.
• Who has the comparative advantage in the
  production of potatoes?
• The farmer.

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II. The principle of comparative advantage

• Why?
• It depends on who can produce what at a lower
  cost.

Amount Produced in 8 Hours
(Opportunity) Cost of producing 1 oz of
Meat
Potatoes
Meat
Potatoes
Farmer
8 oz
32 oz
4 oz of potatoes
1/4 oz of meat
Rancher
24 oz
48 oz
2 oz of potatoes
1/2 oz of meat
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II. The principle of comparative advantage

• Who should produce and specialize in what?
  (Specialization)
• People/Countries should specialize in
• the goods or services in which they have the
  comparative advantage, i.e.
• the goods or services that they can produce at
  lower (opportunity) costs, cheaper, compared to
  others.

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II. The principle of comparative advantage

• The rancher should produce and specialize in meat
  production.
• The farmer should produce and specialize in
  potato production.
• What should Tiger Woods specialize in?
• What should Kobe Bryant specialize in?

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II. The principle of comparative advantage

• Why do people countries trade?(Gains from
  trade)
• Trade allow people countries to specialize in
  what they do best, i.e. in activities where they
  have comparative advantage.
• People countries gain/benefit from
  specialization and trade.

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II. The principle of comparative advantage

• Why do people countries trade?(Gains from
  trade)
• Trade allows people countries to enjoy a
  greater variety of GS.
• Peoples and countries consumption possibilities
  frontier (CPFs) are outside their PPFs.

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II. The principle of comparative advantage

• How do people countries trade?
• People trade by selling and buying GS.
• Countries trade by exporting and importing GS.

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II. The principle of comparative advantage

• What happens when people countries trade?
• People/Countries benefit from trade. They enjoy
  more GS at lower costs.
• They face the following tradeoffs
• - They must cooperate with one another.
• - They become dependent on one another for the
  goods or services.

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Summary
Absolute advantage(AA)
Using fewer resources (Being more productive)
Comparative advantage(CA)
Producing more cheaply, having lower opportunity
cost(Being more suited to produce)
Specialization(Z)
In area/activities withcomparative advantage
Trade(T)
Buying, importingselling, exporting
Gains from trade(GfT)
More GS to enjoy CPF PPF
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III. Applications of comparative advantage

• Should Tiger Woods mow his own lawn? Why?
• Should the U.S. trade with other countries? Why?

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Summary

• A producer/country that has an absolute advantage
  can produce a good/service using fewer inputs
  than others.
• A producer/country that has a comparative
  advantage can produce a good/service cheaper than
  others.

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Summary

• People countries specialize in goods/services
  that they can make cheaper than others, i.e. in
  goods/services that they have comparative
  advantage.
• Trade can make people and countries better off.

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Summary

• With trade, the consumption possibilities
  frontier moves outside the production
  possibilities frontier.
• People countries trade by selling (exporting)
  and buying (importing) GS.

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Now you know

• the story about a cattle rancher and a potato
  farmer.
• how to determine who has an edge in the
  production of a good or service.
• who should produce the good or service.
• who should specialize in what.

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Now you know

• why people countries trade.
• how people countries trade.
• what happens when people countries trade.

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What did you study this time?

• Chapter 3Interdependence gains from trade
• A parable for the modern economy
• The principle of comparative advantage
• Applications of comparative advantage

Any questions?
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What will you study next time?

• Chapter 4
• Market Forces of Demand Supply
• Introduction
• I. Demand
• II. Supply
• III. Market situations
• IV. Changes in demand supply

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End-of-ClassPractice Quiz 1
Practice Quiz 2
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See You! Take Care!