Chapter 3 notes - Chapter 3 Interdependence and the Gains...

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Chapter 3: Interdependence and the Gains from Trade People provide you and other consumers with the goods and services they produce because they get something in return. A PARABLE FOR THE MODERN ECONOMY Look at a simple economy o Two people in world, a cattle rancher and a potato farmer Both would like to eat potatoes and meat o The gains of trade would be obvious if each could only produce one product o Trade would allow them to enjoy a greater variety of food o Gains would also be similar if the rancher and farmer were each capable of producing the other food, but only at a great cost o The cattle and rancher can each benefit from each other by specializing in what he or she does best and then trading with each other o The gains from trade are less obvious when one person is better at producing every good. Suppose the rancher is better at raising cattle and growing potatoes Should the rancher and farmer remain self-sufficient? Production of Possibilities The farmer and rancher work 8 hours/day and devote this time to growing potatoes and raising cattle The farmer can produce an ounce of potato in 15 min and an ounce of meat in 60 min
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