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Sep.26 2013.docx

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David Gray

ECO1104 Sep. 26 , 2013 YUJIE YI #7038840  But would rancher accept such a trade?  In autarky, rancher has to give up 1 kg of meat for 2 kg potatoes - A1-for-2 tradeoff (meat for potatoes) [Initial Output]  Might start producing 12 kg of meat and 24 kg potatoes  With free trade, rancher can: - Move to producing 12 kg potatoes and 18 kg meat - Exchange 5 kg of meat for 15 more kg of potatoes  Note the [gain 3 give up 1] tradeoff rather than the [gain 2 give up 1] tradeoff; its now more favourable - End up with 13 kg of meat and 27 kg of potatoes for a net gain of +1 kg meat and +3 kg potatoes [Final Consumption]  Both parties are made better off (can consume more) by specialization and trade at the rate of 3 kg of potatoes for 1 kg of meat, even though the rancher is more efficient in the production of both goods - In other words, the rancher has the absolute advantage in the production of both goods Chapter 4 The Market Forces of Supply and Demand  Another economic model - Considered “the bread and butter” of microeconomics  Purpose: to analyze the allocation of the production of goods and services across industries of the economy - It responds to the Q question. What goods and services should be produced, and in what quantities? 1 /4 THE DEMAND FUCTION D = f (price; consumer preferences, income, prices of related goods, expectations of future price and/ or income) - Table of data displayed in Figure 4.1 Price is the most important factor Some tricky definitions that no one learns:  Quantity demanded: total amount of a good or service that all consumers are able and willing to buy given a price per unit of time. - It is a point on the horizontal axis of the DEMAND CURVE  Demand: total relationship between Price (P) and quantity demanded (Qd) - Its graph is the DEMAND CURVE Intuitively, think of a hypothetical survey - If the going price were …$, how many units would you be able and willing to buy each week? - This relationship must be estimated.As we will see, producers estimate demand using trial and error process We are abstracting from all other possible
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