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Lecture 3

# COMMERCE 1AA3 Lecture Notes - Lecture 3: Tiger Woods, The O.C., Opportunity Cost

Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Lecture
3

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Microeconomics – Lecture 3/Chapter 3 (Gains from Trade)
Supposed there are 2 people in the economy:
oThe potato farmer
oThe meat rancher
Opportunity cost of producing each good for each person:
oFor farmer:
To get 32 potatoes, give up 8 meat
To get 1 potato, give up ¼ meat
The opportunity cost of a potato = ¼ meat
The opportunity cost of a meat = 4 potatoes
oFor Rancher:
To get 48 potatoes, give up 24 meat
To get 1 potato, give up ½ meat
The opportunity cost a potato = ½ meat
The OC of a meat = 2 potato
Opportunity cost of
potato
Opportunity cost of a
meat
farmer ¼ meat 4 potatoes
Rancher ½ meat 2 potatoes
oThe ability to produce a good with a lower OC than somebody else.
Therefore the farmer has a CA in potatoes whereas the rancher
has a CA in meat
oThe ability to produce a good with a smaller quantity of inputs
oAA is useless to decide whether trades should take place or not
oGains from specialization and trade are based on CA only
oCannot have a comparative advantage in both goods!
oRancher has an AA in both goods, but there are still gains to be made
oFarmer should specialize in producing potatoes and trade/export
potatoes for meat (Import)
oRancher should specialize in producing meat and trade/export meat
for potatoes (Import)
oGeneral Rule:
For both parties to gain from trade, the price at which they
trade must lie between the two opportunity costs.
oThey agree on a price of 15 potatoes for 5 meats
o15/15=5/13
o1=1/3
Should Tiger Woods Wash his own car?
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