Chapter 3 Lecture Outline - Economics 101H Vandan Desai...

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Economics 101H Vandan Desai P a g e | 1 Chapter 3: Interdependence and the Gains from Trade (Lecture Outline) -------------------------------------------------------------------------------------------------------------------------- I. A Parable for the Modern Economy Simple Economy = 2 people (cattle rancher & potato farmer), 2 goods (meat & potatoes) i. If each can produce only one product… 1. They will trade just to increase the variety of products they consume. 2. Each benefits because of increased variety. ii. If each can produce both goods, but each is more efficient than the other at producing one good… 1. Each will specialize in what he or she does best, total output will rise, and they will trade. 2. Trade allows each to benefit because trade allows for specialization, and specialization increases the total production available to share. iii. If one producer is better than the other at producing both meat and potatoes, there are the same advantages to trade but it is more difficult to see. II.
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