ECON2209 Lecture Notes - Lecture 2: Market Power, Diminishing Returns, Absolute Advantage
January 18th
● Opportunity Cost
○ Martha
○ Paul
Martha
Paul
Writing poems: .5
.67
Writing Songs 2
1.5
○ Martha has a comparative advantage writing poems (Lower opportunity cost than
Paul)
○ Paul has a comparative advantage in writing songs
○ Theory of comparative advantage says, the person who has a comparative
advantage in a good… they should concentrate on that good so society can gain
○ Babe Ruth has an absolute advantage in both hitting and pitching but had a
comparative advantage in hitting… so focused on that.
○ First assignment is due maybe next thursday
○ How can we trade?
○ Specialization and Trade, specialize in the production in good in which you have
a CA… then trade
● Real Exchange rate
■ Rate at which goods are traded
■ Within opportunity cost
■ Ex: Poem vs. Song, we have 2 for 1.5… so the terms of trade could be 1
song for anything between 1.5 poems to 2 poems
■ Can use this range to determine terms of trade or the real exchange rate
■ X10… 15 poems < 10 songs < 20 poems
■ So… 10 songs for say 17 poems makes sense
● Micro Tools (Chapter 2)
○ 1. Supply and Demand Analysis
■ We assume markets are stable, and competitive
● Many buyers and sellers
● Firms produce an identical product (homogeneous)
● Perfect information (everyone knows what everyone is charging)
● No barriers to entry
● Firms have no market power
○ Price takers, cannot set prices
● Firms have no effective market power
○ Difference? Has to do with maintaining economic profits in
the long run
○ In the long run have zero economic profit!
○ 2. Demand
■ Buyers side of the market
■ A. Determinants of individual demand?
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Martha has a comparative advantage writing poems (lower opportunity cost than. Paul has a comparative advantage in writing songs. Theory of comparative advantage says, the person who has a comparative advantage in a good they should concentrate on that good so society can gain. Babe ruth has an absolute advantage in both hitting and pitching but had a comparative advantage in hitting so focused on that. First assignment is due maybe next thursday. Specialization and trade, specialize in the production in good in which you have a ca then trade. Ex: poem vs. song, we have 2 for 1. 5 so the terms of trade could be 1 song for anything between 1. 5 poems to 2 poems. Can use this range to determine terms of trade or the real exchange rate. X10 15 poems < 10 songs < 20 poems. So 10 songs for say 17 poems makes sense. We assume markets are stable, and competitive.