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Lecture 3

ECO101H1 Lecture 3: Comparative Advantage and the Gains from Trade

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University of Toronto St. George

ECO100Y1 Lecture 3 : Comparative Advantage and the Gains From Trade Professor: James Pesando The Economic Way of Thinking: A Final Perspective 1) If you could save 30 on a 60 textbook, would you travel downtown to buy it (rather than UofT bookstore) 2) If you could save 30 on a 1,000 computer, would you travel? Rational Decision Making MB = 30 MC (OC): If <30, buy both downtown If >30, buy both at UofT Some would travel to save 30 on textbook, but not 30 on computer This is NOT rational Individuals do not always make rational decisions What is the use of economics, then? Determining the accuracy of PREDICTIONS based on rational decision making I.e. Restaurants staying open for lunch, motor vehicle accidents going up after mandatory seatbelt laws, university enrolment rising during recession Insight: Predictions of economic analysis are usually accurate New study of Behavioural Economics Nonrational decision making Production Possibilities Frontier (PPF) Scarcity (attainable vs. not attainable) Tradeoffs (choicesdecisions) Result of scarcity Opportunity Cost Key Application: Illustration of benefits of trade between countries and individuals Constant Opportunity Cost: Producing two goods Gumdrops and Chocolates
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