ECON-110 FA3 Lecture Notes - Lecture 2: Absolute Advantage, Comparative Advantage, Opportunity Cost
22 Oct 2016
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Trade moves resources from low-value uses to high-value uses. Trade moves production from high-cost producers to low-cost producers. Without trade, the knowledge of a three-person society equals the knowledge of one person. When people specialize they end up bringing more knowledge into a society because everyone doesn"t have to know the same basic things. Ex: reducing trade partners is like only using internet links created in dc. Produce a good using fewer inputs than another producer. Bob has an absolute advantage in meat and potatoes. Produce a good at lower opportunity cost than another producer. When alice produces 1 meat, she gives up 4 potatoes. When bob produces 1 meat, he gives up 2 potatoes. When alice produces 1 potato, she gives up meat. When bob produces 1 potato, he gives up meat. Both parties gain from trade (not equal) > both people get richer but no income equality.
