Lecture7_

Lecture7_ - Comparative Advantage: The Basis for Exchange...

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Comparative Advantage: The Basis for Exchange LECTURE
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Slide 2 The Basis for Exchange Remember, economics is the study of how people make choice in an attempt to satisfy their wants and needs under conditions of scarcity. How do we satisfy our wants and needs in a global economy?
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Slide 3 The Basis for Exchange We can be economically self-sufficient… Grow our own food… …paint our own houses… … repair our own roofs…
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Slide 4 The Basis for Exchange …or we can specialize and trade with others.
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Slide 5 Why Not do Everything on Our Own? Should a lawyer type his mail if he can type faster and more accurately than his secretary? The lawyer's opportunity cost as a typist is too high to allow him to do his own typing. Paying a secretary – even one with modest skills – will be money well spent for the lawyer.
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Slide 6 Absolute / Comparative Advantage The lawyer has an absolute advantage over his secretary at typing his letters, because he takes fewer hours to perform that task than her… …but his secretary has a comparative advantage over him at typing his letters, because her opportunity cost of performing that task is lower than his opportunity cost.
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Slide 7 Should a hair stylist shampoo if he can shampoo faster and more thoroughly than his assistant / trainee? He should hire an assistant because shampooing returns much less than more serious procedures such as cutting, hair coloring, etc. Why Not do Everything on Our Own?
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Slide 8 The Basis for Exchange Why do people exchange goods and services in the first place? People engage in trade because they want to consume a wider range of goods and services than they can produce for themselves. If we specialize in the activities at which we are relatively most efficient, we can all have more of every good and service.
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Slide 9 The Basis for Exchange Why can we do better by concentrating on those activities at which we perform best relative to others?
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Slide 10 The Basis for Exchange Example Paul is a house painter whose roof needs replacing. Steve is a roofer whose house needs painting. Although Paul is a painter, he also knows how to install roofing and Steve knows how to paint houses. Should Paul roof his own house? Should Steve paint his own house?
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Slide 11 The Basis for Exchange Time required by each to complete each type of job: Painting Painting Roofing Roofing Paul Paul 300 hours 300 hours 400 hours 400 hours Steve Steve 200 hours 200 hours 100 hours 100 hours Steve has an absolute advantage over Paul at both painting and roofing, because he takes fewer hours to perform each task than Paul does.
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Slide 12 Comparative Advantage and Opportunity Cost Should Steve do the roofing and painting jobs for both houses? Not necessarily if Paul has a
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This note was uploaded on 04/21/2011 for the course ECON 1001 taught by Professor S.c during the Fall '10 term at HKU.

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Lecture7_ - Comparative Advantage: The Basis for Exchange...

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