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Lecture 4

Lecture 4-The Gains from Trade

6 Pages
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Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

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Friday, September 25th, 2009.
The Gains from Trade
2 Individuals
Gains from trade not controversial
(Note that neither Jane nor John experiences a temporary period of unemployment)
2 Countries (Canada and United States)
Jobs will be lost (no comparative advantage)
And jobs will be gained (comparative advantage)
Why is Free Trade so Controversial?
1. Benefits are widely distributed
Costs (example, plant shutdown) tend to be concentrated
2. Focus of public debate is on job gains and looses, not on
- lower prices to consumers
- higher productivity and standard of living in the long run
Example: Sharp Increase in bicycles imported from China (2005-2006)
1. Reaction
Consumers (many) benefit from lower prices
Producers (few) lobby government to restrict imports
2. Economics
- China has comparative advantage in production of bicycles; Canada does
not
- Bicycle production in Canada will fall (jobs lost ± workers will, after
transition, find other jobs)
Bill Gates (Microsoft): Should he write computer program?
1. Time to write computer program
Gates: 3 hours
Consultant: 10 hours
2. Next best alternative
Gates earns $10,000 per hour as executive
Consultant earns $100 per hour
www.notesolution.com
3. Opportunity cost of writing program
Gates: $30,000 (3 hours times $10,000)
Consultant: $1,000 (10 hours times $100)
4. Results
(1) Gates has absolute advantage
(2) Consultant has comparative advantage
(3) Consultant should write program
Competitive Market
Many buyers and sellers, each of whom has no influence on market price
Example: coffee
Laws of Downward Sloping Demand:
Other things equal, the higher is the price of a good, the lower is the quantity
demanded
Candy Bars
Price Quantity Demanded
5 0
4 3
3 6
2 9
3
6
5
4
3
Q
P
Candy Bars
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Description
Friday, September 25th, 2009. The Gains from Trade 2 Individuals Gains from trade not controversial (Note that neither Jane nor John experiences a temporary period of unemployment) 2 Countries (Canada and United States) Jobs will be lost (no comparative advantage) And jobs will be gained (comparative advantage) Why is Free Trade so Controversial? 1. Benefits are widely distributed Costs (example, plant shutdown) tend to be concentrated 2. Focus of public debate is on job gains and looses, not on - lower prices to consumers - higher productivity and standard of living in the long run Example: Sharp Increase in bicycles imported from China (2005-2006) 1. Reaction Consumers (many) benefit from lower prices Producers (few) lobby government to restrict imports 2. Economics - China has comparative advantage in production of bicycles; Canada does not - Bicycle production in Canada will fall (jobs lost ± workers will, after transition, find other jobs) Bill Gates (Microsoft): Should he write computer program? 1. Time to write computer program Gates: 3 hours Consultant: 10 hours 2. Next best alternative Gates earns $10,000 per hour as executive Consultant earns $100 per hour www.notesolution.com 3. Opportunity cost of writing program Gates: $30,000 (3 hours times $10,000) Consultant: $1,000 (10 hours times $100) 4. Results (1) Gates has absolute advantage (2) Consultant has comparative advantage (3) Consultant should write program Competitive Market Many buyers and sellers, each of whom has no influence on market price Example: coffee Laws of Downward Sloping Demand: Other things equal, the higher is the price of a good, the lower is the quantity demanded Candy Bars Price Quantity Demanded 5 0 4 3 3 6 2 9 3 6 5 4 3 Q P Candy Bars www.notesolution.com Market Demand Curves Market Demand Curve 1. A change in quantity demanded (as the price of the good changes) is a movement along the demand curve 2. A change in demand (for a given price) is a shift in the demand curve 3. Sources of shifts in demand curves - Price of related goods Substitutes ³LQVWHDGRI´ Complements ³WRJHWKHU´ - Income - Preferences, tastes - Expectations (eg. If a higher income is expected next month, you would be more willing to spend. Or, if price of a certain good is H[SHFWHGWRORZHUWRPRUURZ\RX¶YHOHVVZLOOLQJWREX \LWDWWRGD\¶VSrice.) - Number of Buyers (if more consumers for a certain product, the quantity demanded in the market would be higher at every price) Shift in Demand Curve for Ice Cream Cones #1 Unusually hot summer 3 6 Q P Jane 3 3 Q P John 3 9 Q P Market (Jane + John) $2 500 Q P DD ± original demand curve DD1 ± demand curve after shift 750 Æ DD DD1 www.notesolution.com #2 Sharp drop in price of yogurt cones (substitute) Supply Curve I. Law of Upward-Sloping Supply Other things equal, the higher is the price of a good; the higher is the quantity supplies Source: firms seeking to maximize profits II. Market Supply Curve: Sum of Firm Supply Curves (Assumes there is a large number of firms, each of which can exert no influence on price.) $2 500 Q P DD ± original demand curve DD1 ± demand curve after shift ÅDD DD1 300 SS Q P www.notesolution.com Market Supply Curves Movement along a Supply Curve versus a Shift in the Supply Curve 1. A change in quantity supplied (as the price of the good changes) is a movement along the supply curve. 2. A change in supply (for a given price) is a shift in the supply curve. 3. Sources: costs of production - prices of factors of production - technology - Prices of other goods - Expectations - Number of sellers Shift in Supply Curve of Coffee #1 Severe Drought in Brazil 6 5 Firm 1 6 7 Firm 2 6 12 Market SS SS Q P SS1 Å$4 100 200 SS ± original supply curve SS1 ± supply curve after shift www.notesolution.com #2 Technological Innovation which Reduced Cost of Harvesting Coffee Beans SS Q P SS1 Æ$4 275 200 SS ± original supply curve SS1 ± supply curve after shift www.notesolution.comth Friday, September 25 , 2009. The Gains from Trade 2 Individuals Gains from trade not controversial (Note that neither Jane nor John experiences a temporary period of unemployment) 2 Countries (Canada and United States) Jobs will be lost (no comparative advantage) And jobs will be gained (comparative advantage) Why is Free Trade so Controversial? 1. Benefits are widely distributed Costs (example, plant shutdown) tend to be concentrated 2. Focus of public debate is on job gains and looses, not on - lower prices to consumers - higher productivity and standard of living in the long run Example: Sharp Increase in bicycles imported from China (2005-2006) 1. Reaction Consumers (many) benefit from lower prices Producers (few) lobby government to restrict imports 2. Economics - China has comparative advantage in production of bicycles; Canada does not - Bicycle production in Canada will fall (jobs lost workers will, after transition, find other jobs) Bill Gates (Microsoft): Should he write computer program? 1. Time to write computer program Gates: 3 hours Consultant: 10 hours 2. Next best alternative Gates earns $10,000 per hour as executive Consultant earns $100 per hour www.notesolution.com
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