EXCHANGE AND MARKETS
Teaching Tips/Topics for Class Discussion
Extended Example 1:
Comparative Advantage and
Extended Example 2:
The North American Free Trade
Problems And Discussion Questions
Model Answers to Questions:
Chapter Opening Questions
Test Your Understanding
Using the Tools
Economics Applied - Using What You’ve Learned
. The concept of comparative advantage and dividing production to minimize opportunity costs
shows why individuals gain through specialization and exchange, the basis for the existence of markets.
Specialization increases productivity through the division of labor. A system of international
specialization and trade is sensible because nations have different opportunity costs of producing goods,
giving rise to comparative advantages.
Markets emerge because self-interested people guided by prices, make decisions about what
products to produce, how to produce them and whom they are produced for.
The government's roles in a market economy include establishing the rules for exchange,
reducing economic uncertainty, and responding to market failures
Why aren't people self-sufficient, producing everything themselves markets exist?
Why have the economies of the former Soviet Union and China moved away from central
planning, relying to a greater extent on market dynamics?
Why are profits an important part of a market economy?
How does EverQuest, the online multiplayer adventure game, illustrate the benefits of
exchange and markets?
Comparative Advantage and Exchange
Specialization and the Gains From Trade
2 individuals (Abe, Bea), 2 goods (pizza per day, paintings
produced per hour).
Abe can produce 6 pizzas per day or 2 paintings;
Bea can produce 1
pizza per day or 1 painting.
2. We can calculate the
of each person’s production;
the principle of
opportunity cost states that the opportunity cost of something is what you sacrifice to get
a. Abe’s opportunity cost of producing 1 painting is 3 pizzas per day;
opportunity cost of producing 1 pizza per day is 1/3 painting.
Bea’s opportunity cost of producing 1 painting is 1 pizza per day;
opportunity cost of producing 1 pizza per day is 1 painting.
Abe has a
in pizza per day because she gives up fewer
paintings (1/3 < 1);
Bea has a comparative advantage in paintings because he gives up
less pizza per day (1 < 3).
Specialization is beneficial if there are differences in opportunity costs as it increases
the production of the group or society.
Teaching tips: Ask the class what their parents do for a living. In a normal classroom,
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