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Lecture 3

Econ 105 Lecture 3 Jan 14th.doc

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ECON 105
Brian Krauth

Econ 105 Lecture 3 Jan 14th Chapter 3: Interdependence and the gains from trade - Specialization = we all do difference things, things that we are really good at. - possible to specialize because of trade - gains from trade - Comparative advantage - principle is true but not oubvious Consider our friend Al. -Al can produce 10 spoonfuls of peanut butter (PB) or 10 slices of bread (B) per hour. -He has 40 hours per week. His PPF looks like this: *****see notebook for graph***** ( 1 ) -efficient doesn't necessarily mean the best outcome ( or even good outcome ), but an outcome from which you can't possibly improve on. Imagine Al lives in autarky ( the state of not trading with the rest of the world ) -autarky = you produce exactly what you consume -In autarky you must choose a consumption "bundle" on or inside of your PPF. -If Al likes peanut butter sandwiches much more than B or PB alone, then he will choose: B = PB = 200 Now suppose Betty can make 20 spoonfuls of peanut butter or 40 slices of bread in an hour. We say that Betty had higher productivity in PB production or an absolute advantage in PB production. - productivity = amount produced / resources used to produce it - Betty also has an absolute advantage in B production. Let's derive Betty's PPF. ***** See notebook for graph ***** ( 2 ) If Betty also likes peanut butter sandwiches, she will pick some point in the middle. ( 600 of both ) Now suppose they can trade. -Al's opportunity cost of -PB = 1B -B = 1PB -Bet
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