Chapter 2_Micro_S09

Chapter 2_Micro_S09 - The Economic Problem: Scarcity and...

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The Economic Problem: Scarcity and Choice
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Chapter 2 Slide 2 Overview Comparative Advantage: The Basis for Exchange Absolute Advantage Comparative Advantage Gains from Specialization and Trade Production Possibility International Trade Are all people better off?
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Chapter 2 Slide 3 Comparative Advantage: The Basis for Exchange Two Basic Results (1) There are gains from specializing in production of goods that you produce efficiently and trading for others. Example Should Norway produce its own oranges?
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Chapter 2 Slide 4 Comparative Advantage: The Basis for Exchange (2) Even if an individual or a country is better at producing all goods, there are still gains from trade. Example Should an attorney, who happens to be the best typist around, type his or her own legal briefs?
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Chapter 2 Slide 5 Exchange and Opportunity Cost Opportunity cost The opportunity cost of producing something measures the costs of not being able to produce something else Opportunity costs are measured in terms of what you are giving up by engaging in a certain activity.
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Chapter 2 Slide 6 Exchange and Opportunity Cost Opportunity cost example: Suppose that Rob can spend an hour either collecting 4 coconuts or catching 8 fish. The opportunity cost of 4 coconuts is 8 fish. The opportunity cost of 1 coconut is 2 fish. The opportunity cost of 8 fish is 4 coconuts. The opportunity cost of 1 fish is ½ coconut.
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Chapter 2 Slide 7 Exchange and Opportunity Cost Absolute Advantage One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person One person has an absolute advantage over another if he or she can produce the same amount with fewer resources
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Chapter 2 Slide 8 Exchange and Opportunity Cost Absolute Advantage Examples: Bill can change 6 tires in 1 hour and Ed can only change 3 tires in 1 hour. Bill has the absolute advantage at changing tires. It takes Bill 10 minutes to change 1 tire and Ed 20. Bill has the absolute advantage.
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Chapter 2 Slide 9 Exchange and Opportunity Cost Comparative Advantage One person has a comparative advantage over another if his or her opportunity cost of performing that task is lower than the other person’s opportunity cost.
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Chapter 2 Slide 10 Exchange and Opportunity Cost: Results In a 2 good, 2 person economy… One person may have an absolute advantage in both goods, but it is impossible for one person to have a comparative advantage in both goods. If one person has an absolute advantage in one good and the other has an absolute advantage in the other, then each will have a comparative advantage in those same goods.
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Chapter 2 Slide 11 Principle of Comparative Advantage When people/countries specialize in the production of goods in which they have a comparative advantage and trade these for the goods in which they have a comparative disadvantage, they will be better off (able to consume more goods than before)
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This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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Chapter 2_Micro_S09 - The Economic Problem: Scarcity and...

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