Chapter3 - Chapter 3: Interdependence and the Gains from...

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Chapter 3: Interdependence and the Gains from Trade A Parable for the Modern Economy - The farmer and the rancher can each benefit by specializing in what he or she does best and then trading with the other (meat and potatoes) 1. Production Possibilities a. Each the rancher and the farmer have their own production possibility frontier, that is limited to exactly what they can produce b. With trade the rancher and the farmer can consume more with trade, outside their original production possibility frontier c. Look at the graphs on page 53 (Figure 2) Comparative Advantage: The Driving Force of Specialization 2. Absolute Advantage a. Compare the inputs required by producers b. Absolute Advantage: the ability to produce a good using fewer inputs than another producer 3. Opportunity Cost and Comparative Advantage a. Whatever must be given up to obtain some item b. Example: Time spent producing potatoes takes away from time available for producing meat, how many units are the rancher and farmer giving up? c.
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This note was uploaded on 10/16/2011 for the course ECON 201 taught by Professor Shoonlai during the Spring '09 term at Miami University.

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