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Chapter 3

ECON 1000 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost


Department
Economics
Course Code
ECON 1000
Professor
Troy Joseph
Chapter
3

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ECON 1000
CHAPTER3- INTERDEPENDENCR AND THE GAINS FROM TRADE
Parable for the modern economy
If there are 2 people, and each can only produce 1 thing (different from the other), it is clear
that they can benefit from trade so that they can both get a taste of the other. But, if they can
both produce both things, but one is better at one thing and the other at the other, then it
makes sense for them to each specialize and trade.
Production Possibilities.
Suppose one person is more productive in BOTH areas. For example: Frank all 8 hiurs in
potatoes= 32kg and 8 hours in meat=8kg. 4 hours of potatoes=16kg and 4 hours in meat =4kg.
This gives a straight line
Rose:
8 hours in potatoes= 48kg
8 hours of meat= 24kg
4 hours of potatoes= 24kg
4 hours of meat= 12kg
Suppose they do not trade, then the production possibilities frontier is also the consumption
possibilities frontier.
Specialization and trade
Make a deal.
Rose says that each should specialize.
Frank will grow potatoes 8 hours a day and he is to give 15kg of his 32kg of potatoes to Rose,
and Rose will give him 5kg of meath in return.
So he would be getting 17kg of potatoes and 5kg of meat, instead of the 16kg of potatoes and
the 4kg of meat he did before.
Absolute advantage
Absolute advantage when comparing the productivity of one person, firm, or nation to that of
another. The producer that requires a smaller quantity of inputs to produce a good is said to
have an absolute advantage in producing that good. Rose has an absolute advantage both in
producing meat and in producing potatoes because she requires less time than Frank.
Opportunity cost and comparative advantage
Rather than comparing inputs required, we can compare the opportunity costs. Opportunity
cost of some item is what we give up to get that item. Time spent producing potatoes,
therefore, takes away from time available for producing meat.
Rose’s opportuity ost of produig 1kg of potatoes is 0.5kg of meat, and 1kg of meat costs 2
potatoes
Franks opportunity cost of 1kg of potatoes is 0.25kg of meat, and 1 kg of meat, costs 4 kg of
potatoes
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