Menu_31_Aug_10 - • Who has the comparative advantage in...

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13:17 TODAY’S MENU:  Tuesday 31 August 2010 I.  BUSINESS A . Practice Problems (answers on Moodle) 1. Chapter 2: 1, 2, 4-8, 10 2. Chapter 4: 1, 3-7, 10-20, 22 II.  SUBSTANCE A. How Trade Can Benefit All: An example 1. Assumptions a. Two Countries: England, Portugal b. Two (homogeneous) Goods: Wine, Cloth c. All workers in a country are equally productive d. Resources: 100 worker/hours in each country 2. Relevant Concepts a. Productivity = output per worker per hour b. Absolute Advantage = highest productivity c. Comparative Advantage = lowest opportunity cost 3. Autarky: production = consumption 4. Specialization and trade according to Comparative Advantage 5. With Trade: consumption > production 6. Conclusions Trade is opposed
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7. Examples Output per worker per hour Bread Bruno 3 Licia 6 Tulips Bruno 15 Licia 18 Oppurtunity cost per unit of Bread Bruno 5 tulips Licia 3 tulips Tulips Bruno 1/5 bread Licia 1/3 tulips Who has the absolute advantage in the production of bread? Tulips? Why? Licia has in bread and tulips because her numbers are higher
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Unformatted text preview: • Who has the comparative advantage in the production of bread? Tulips? Why? • When they trade the cost of bread will be between 3 and 5 tulips. Between 1/5 and 1/3 bread will be cost of tulips If trade can make everyone better off why is there opposition? People still lose jobs B. Buyers’ side of market: Demand 1. Definition 2. Not to be confused with Quantity Demanded 3. Determinant of Quantity Demanded a. Price of good (-) i. Link with Reservation Price 4. Determinants of Demand a. Income i. Normal good (+) ii. Inferior good (-) b. Price of related goods i. Substitutes: Increase price (+) ii. Complements: Increase price (-) c. Tastes and preferences (+) d. Expectations i. Future price (+) ii. Future income: normal good (+); inferior good (-) e. Number of buyers (+) III. NEXT TIME A. Continue Chapter 4: “Supply and Demand”...
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Menu_31_Aug_10 - • Who has the comparative advantage in...

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