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Lecture 3

ECON 20A Lecture 3: Lecture 3

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University of California - Irvine
William Branch

Lecture 3 I. The Gains from Trade a. Castaway i. Tom is only one on island, spends 8 hours a day picking coconuts and catching fish ii. How should he spend his time? Depends on productivity and preferences for coconuts relative to fish. Lets assume 1. Can catch 6 fish per hour 2. Can collect 12 coconuts per hour iii. Can catch 48 fish per day, 96 coconuts per day iv. We can use a graph called production possibility frontier, to examine all of the options b. Trade i. Now suppose that there is another inhabitant: Robinson Crusoe ii. Rob can catch 2 fishhour, collect 8 coconutshour iii. Rob consumes 8 fish and 32 coconuts iv. Tom 24 Coconut, 36 Fish v. Rob 64 Coconuts, 0 fish vi. Table Tom Rob Coco Fish Coco Fish Production 24 36 64 0 Trade +28 10 28 +10 Consumption 52 26 36 10 Net Gain +4 +2 +4 +2 c. Absolute Advantage ability to produce more of a good, given inputs, then another producer d. Comparative advantage the ability to produce a good at a lower opportunity cost than another producer i. What are Toms opportunity costs? 1. To get 1 fish, Tom has to give up 2 coconuts 2. To get 1 coconut, Tom has to give up fish ii. So, Toms opportunity cost of fish is 2, and opportunity cost of coconuts is iii. Similar calculations for Rob has his opportunity cost of fish is 4 and opportunity cost of coconuts is iv. Toms opp. cost for fish < Robs opp. cost for fish Tom has a comparative advantage in fish v. Robs opp. Cost for coconuts < Toms opp. cost for coconuts Rob has comparative advantage in coconuts vi. Tom specializes in fish production since he can do it at a lower opp. cost, Rob specializes in coconuts vii. Trade, and patterns of trade, are based on comparative advantage
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