EC 201 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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12 Oct 2016

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EC 201 Chapter 3 Interdependence and the Gains from Trade

Two goods Charlie and Patty

Two goods cups and plates

If Charlie focuses all his time (8 hours) to make cups, he can make 30 cups per day. If he

only makes plates, he makes 10 plates a day.

If Patty focuses all her time (8 hours), she can make 10 cups per day. If she only makes

plates, she makes 30 plates a day.

Charlie: 30 cups or 10 plates

Opportunity Cost of 30 cups = 10 plates

1 cup = 1/3 plate

3 cups = 1 plate

Patty: 10 cups or 30 Plates

Opportunity Cost of 10 cups = 30 plates

1 cup = 3 plates

1/3 Cup = 1 plate

Absolute advantage

Charlie has absolute advantage in cups. 30 > 10

Patty has absolute advantage in plates. 30 > 10

Comparative advantage

Cups:

Charlie's Opportunity Costs of 1 Cup = 1/3 plate

Patty’s Opportuity Cost of 1 cup = 3 plates

1/3 < 3

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Sice Charlie’s opportuity cost is loer, he has the coparatie advantage in cups.

Plates:

Charlie’s Opportuity Cost of 1 plate = 3 cups

Patty’s Opportunity Cost of 1 plate = 1/3 cups

1/3 < 3

Sice Patty’s Opportuity cost is loer, she has the coparatie adatage i plates.

Specialization

Charlie specializes in making cups and makes 30 cups ( Since he has the comparative

advantage in cups)

Patty specializes in making plates and makes 30 plates ( Since she has the comparative

advantage in plates)

Terms of Trade

1 cup for 1 plate

Charlie makes 30 cups, he gives away half (15)

➔ 15 cups, 15 plates

Patty makes 30 plates, she gives away half (15)

➔ 15 plates, 15 cups

With Charlie’s e iproed techology:

Charlie can make 40 cups or 40 plates per day with new technology

Patty can make 10 cups or 30 plates per day

Absolute Advantage

- in cups -> Charlie 40 > 10

- In plates -> Charlie 40 > 30

Comparative Advantage

- In cups: Charlie’s opportuity cost of 1 cup = 1 plate

Patty’s opportuity cost of 1 cup = 3 plates

➔ Charlie’s opportuity cost is lower (1 <3) Specializes in cups

➔ Makes 40 cups per day

- I plates: Charlie’s opportuity cost of 1 plate = 1 cup

Patty’s opportuity cost of 1 plate = 1/3 cup

➔ Patty’s opportuity cost is loer 1/3 < 1 Specializes i plates

➔ Makes 30 plates per day

Terms of Trade

Charlie wants at least one plate for each cup

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Document Summary

Ec 201 chapter 3 interdependence and the gains from trade. If charlie focuses all his time (8 hours) to make cups, he can make 30 cups per day. If he only makes plates, he makes 10 plates a day. If patty focuses all her time (8 hours), she can make 10 cups per day. If she only makes plates, she makes 30 plates a day. Opportunity cost of 10 cups = 30 plates. Opportunity cost of 30 cups = 10 plates. Charlie"s opportunity costs of 1 cup = 1/3 plate. Patty"s opportu(cid:374)ity cost of 1 cup = 3 plates. Si(cid:374)ce charlie"s opportu(cid:374)ity cost is lo(cid:449)er, he has the co(cid:373)parati(cid:448)e advantage in cups. Charlie"s opportu(cid:374)ity cost of 1 plate = 3 cups. Patty"s opportunity cost of 1 plate = 1/3 cups. Si(cid:374)ce patty"s opportu(cid:374)ity cost is lo(cid:449)er, she has the co(cid:373)parati(cid:448)e ad(cid:448)a(cid:374)tage i(cid:374) plates. Charlie specializes in making cups and makes 30 cups ( since he has the comparative.

Related Questions

I am working on this question related to chapter 3 in Mankiw's Microeconomics book. I am having a tough time grasping the process of economics. So I'm listing the question and would like someone to describe the process to calculate this question.

1. Gary and Diane must prepare a presentation. As part of their presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the required calculations and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations and 20 hours to prepare the slides.

a. How much time would it take the two to complete the project if they divide the calculations equally and the slides equally? My inclination is to divide the amount of time each can do and find the average? So it would take them 11 hours for the calculations and 15 hours to produce the slides?? Is this the correct thought process?

b. How much time would it take the two to complete the project if they use comparative advantage and specialize in calculating or preparing slides? Here - does Diane have the lower opportunity cost as she is realizing less time to complete the project because it takes less time for Gary to produce calculations and slides? So she has a comparative advantage?

c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides? The only other solution I can apply here is: Gary is quicker at both calculating and preparing slides, but Diane is only slightly slower in preparing calculations but much longer at preparing slides - so give the slides to Gary and the calculations to Diane? How do I present this?

erinmink575

For which of the following nations does international trade account for the largest percentage of GDP?
A) Japan
B) The Netherlands
C) Germany
D) Great Britain
E) the United States

2. Suppose that workers in Transylvania can produce only two goods-- yo-yos or sweat socks. The Transylvanian currency is the dealer. In what unit is the opportunity cost of yo-yos measured?
A) dealers
B) dealers per yo-yo
C) dealers per sweat sock
D) yo-yos
E) sweat socks

3. For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany can produce one watch for every100 pounds of cheese it produces. Which of the following is true with regard to opportunity costs in the two countries?
A) The opportunity cost of producing watches is lower in Denmark.
B) The opportunity cost of producing cheese is lower in Denmark.
C) The opportunity cost of producing watches is identical in both countries.
D) It is impossible to compare opportunity costs because the two countries use different currencies.
E) In Germany the opportunity cost of producing one pound of cheese is one watch.

4. For each bow the Romans are producing, they give up the opportunity to make 10 arrows. The Dacians are giving up producing2 bows for every 40 arrows they are producing. Which of the following is true regarding comparative advantage?
A) The Romans have a comparative advantage in producing arrows
B) The Romans have a comparative advantage in producing bows
C) The Romans have a comparative advantage in producing arrows and bows
D) The Dacians have a comparative advantage in producing arrows and bows
E) The Dacians have a comparative advantage in producing bows

5. Which of the following is not a basis for trade between two nations?
A) different skill levels of the labor forces
B) one nation's absolute advantage
C) a difference in tastes between countries
D) economies of scale
E) different capital stocks

6. The opportunity cost of producing one car in Germany is 2,000bushels of wheat, and the opportunity cost of producing one car in Canada is 1,200 bushels of wheat. The two countries can realize mutual gains from trade if they agree on terms of trade that are
A) greater than 2,000 bushels of wheat per car
B) less than 1,200 bushels of wheat per car
C) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces wheat
D) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and Germany produces cars
E) greater than 1,200 bushels of wheat per car and less than 2,000bushels of wheat per car, and each country produces both goods

7. The rate at which two countries trade one good for another
A) is known as the foreign exchange rate
B) is known as the terms of trade
C) is known as the export line
D) equals the slope of the import line
E) equals the common slope of the countries' production possibilities frontiers

8. Which of the following is true?
A) International trade makes it possible for a country's consumption possibilities to exceed its production possibilities.
B) International trade requires that a country's production possibilities exceed its consumption possibilities.
C) A country's production possibilities always equal its consumption possibilities.
D) A country's consumption possibilities can never equal its production possibilities because of leakages in the system.
E) As long as there is full employment of resources, a country's production possibilities will exceed its consumption possibilities even with trade.

9. Which of the following is not a reason for international specialization?
A) some countries have educated, trained workers, while other countries have unskilled workers
B) tastes and preferences tend to be different in different countries
C) economies of scale can allow larger, specialized producers to operate at a lower average cost
D) mineral resources are often concentrated in particular countries
E) the world price of a good is determined by the world supply and demand for it

10. Ad valorem tariffs on imports are based on a percentage of an import's value; specific tariffs are based on a lump sum per physical unit imported.
A) True
B) False

raspberrychimpanzee903

1. The cost-benefit approach to deciding whether or not to undertake any activity argues that you should engage in the activity if:
a. The marginal cost of the activity exceeds the marginal benefit of the activity.
b. The marginal benefit of the activity exceeds the marginal cost of the activity.
c. There are benefits associated with the activity
d. There are costs associated with the activity

2. In the circular flow model, the household sector:
a. Demand goods and services in output markets, while the business sector supplies them.
b. Supplies goods and services in output markets, while the business sector demands them.
c. Demands and supplies goods and services in output markets.
d. Neither demands nor supplies goods and services in output markets.

3. In resource markets, households operate on the ________ side and business firms operate on the ______ side; these activities represent ______for households and _______ for business firms.
a. Demand; supply; income; revenue
b. Demand; supply; expenditures; revenue
c. Supply; demand; expenditures; costs
d. Supply; demand; income; costs

4. Ice cream sales and the incidence of polio were strongly correlated prior to the development of the polio vaccine. Assuming that eating ice cream caused polio is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

5. Assuming that everyone is better off when a bridge is built in Alaska to serve a small community is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

6. A production possibilities frontier for two outputs is drawn assuming that:
a. Opportunity cost is fixed, but the quantity and quality of resources changes
b. Both outputs use the same quantity of each resource, but the technology differs
c. The amount of resources currently available for production is fixed
d. The technology available can only be applied to producing one of the outputs

7. When wants and needs exceed the resource available to satisfy them:
a. Scarcity exists and society must rely on the government to allocate resources.
b. Scarcity exists and society must rely on free markets to allocate resources.
c. Scarcity exists and decisions must be made about how to allocate limited resources among competing uses.
d. Scarcity does not exist so it is not necessary to allocate resources.

8. If Carl is able to produce a greater number of baskets per hour than Sheila, then:
a. Carl cannot have a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

9. If Carl's opportunity cost per basket is 4 bowls, but Sheila's opportunity cost per basket is 3 bowls, then:
a. Carl has a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

10. Which of the following is not an example of the factor of production or economic resource referred to as capital?
a. An office building
b. Computers used by a tax preparation business
c. Lawnmowers owned by a landscaping firm
d. Money used to start a new business.

lavenderhippopotamus513

EC 201 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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