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Chapter 4

Microeconomics Idson Chapter 4 .docx

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Department
Economics
Course
CAS EC 102
Professor
Neil Watson
Semester
Fall

Description
Microeconomics  Idson 2014 Chapter 3: Independence and the Gains from Trade  Parable for the Modern Economy  ­ Only two goods: meat and potatoes and only two people: rancher and farmer  ­ If rancher only produces meat and farmer produces only potatoes both gain from  trade  ­ If both rancher and farmer produce both meat and potatoes: both gain from  specialization and trade  ­ PPC: various mixes of outputs that an economy can produce  ­ Specialization and Trade  o Farmer – specialize in growing potatoes   More time growing potatoes   Less time raising cattle  o Rancher – specialize in raising cattle   More time raising cattle   Less time growing potatoes  o Trade: 5 oz. of meat for 15 oz. of potatoes  ­ How Trade expands the set of consumption opportunities  Comparative Advantage  ­ Absolute advantage: produce a good using fewer inputs than another producer  ­ Opportunity Cost: what must be given up to obtain some item. o Measures trade off between the two goods that each producer faces  ­ Comparative Advantage: produce a good a lower opportunity cost than another  producer  o Reflects the relative opportunity cost  o Principle of comparative advantage: Each good produced by the  individual that has the smaller opportunity cost of producing that good.  One person can have absolute advantage in both good  One person cannot have comparative advantage in both goods   For different opportunity costs one person has comparative  advantage in one good while the other person has the comparative  advantage in the other good  o Op
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