Econ_100_Ch8

Econ_100_Ch8 - ECON 100: Introduction to Microeconomic...

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Slide 1 of 37 Slide 1 of 1 ECON 100: Introduction to Microeconomic Theory Lecture 10 Yilan Xu
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Slide 2 of 37 Introduction In this chapter we… Examine why trade is beneficial. Use the supply and demand model to analyze trade. Evaluate political and economic arguments that free trade is not necessarily good.
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Slide 3 of 37 Why Trade? Three benefits of trade 1. It allows for division of knowledge. 2. It allows economies of scale and creates greater competition. 3. It increases wealth through the principle of comparative advantage. Let’s look at each of these in turn.
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Slide 4 of 37 Why Trade? 1. Division of Knowledge—Specialization In a modern economy—more knowledge is used than can reside in a single brain. Specialization →↑ knowledge → ↑productivity Without trade, specialization is not possible. Trade connects all markets. Example: Dog walkers, closet organizers give physicians the time to perfect their skills. 1. Trade → ↑markets → ↑division of knowledge Entrance of China, Eastern Europe, and Russia into world markets → ↑ stock of engineers, scientists → ↑ available knowledge
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Slide 5 of 37 Why Trade? 2. Economies of Scale and Creating Competition Economies of Scale —Larger scale production reduces costs. Trade → ↑specialization → larger scale production → economies of scale. Example: Forming the EU → ↑specialization → larger firms → ↓ prices → EU firms become more competitive in the world market.
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Slide 6 of 37 Why Trade? 2. Economies of Scale and Creating Competition (cont.) Trade Creates Competition Example: 1980s export restraints by Japanese → ↓ Imports of Japanese cars → Price of Japanese cars ↑ by $1,300 Price of American cars ↑ by $660. International competition keeps domestic firms competitive and on their toes. Threat of foreign competition keeps domestic prices down.
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Slide 7 of 37 Why Trade? 3. Comparative Advantage Absolute advantage is the ability of an individual, firm, or country to produce a good or services using fewer resources than other producers. Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers. Law of Comparative Advantage : Specialize in producing a good IF Lower opportunity cost of producing it
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Slide 8 of 37 Comparative Advantage: An Exercise 8 (a) United States Production possibilities with 100 million workers (millions of units per day) U 1 U 2 U 3 U 4 U 5 U 6 Food Clothing 600 0 480 60 360 120 240 180 120 240 0 300 (b) Izodia
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This note was uploaded on 02/17/2012 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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Econ_100_Ch8 - ECON 100: Introduction to Microeconomic...

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