ECON 101 Chapter Notes - Chapter 8: Comparative Advantage, Opportunity Cost, Absolute Advantage

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28 Mar 2019

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ECON 101 Full Course Notes

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Chapter 8 - gains from trade and international trade better use, generating gains from trade. Gains from trade - the benefits that come from reallocating resources, goods and services to. Absolute advantage - the ability to do a task using fewer inputs. Comparative advantage - the ability to do a task at a lower opportunity cost. You should allocate each task to the person with the lowest opportunity cost. This is comparative because opportunity cost compares what you can produce if assigned once task with what you would produce if you spent that time on another task. And it"s an advantage, because a lower opportunity cost means that you give up less to get a task done and it"s more efficient for you to do that task. When each person in a group focuses on the task for which they have a comparative advantage, the group will produce more. How to identify who has the comparative advantage in each ask:

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Suppose that Greece and Switzerland both produce beer and olives. Greece's opportunity cost of producing a crate of olives is 4 barrels of beer while Switzerland's opportunity cost of producing a crate of olives is 10 barrels of beer. By comparing the opportunity cost of producing olives in the two countries, you can tell that.... has a comparative advantage in the production of olives and has a comparative advantage in the production of beer. Suppose that Greece and Switzerland consider trading olives and beer with each other. Greece can gain from specialization and trade as long as it receives more than of beer for each crate of olives it exports to Switzerland. Similarly, Switzerland can gain from trade as long as it receives more than..... of olives for each barrel of beer it exports to .... Based on your answer to the last question, which of the following prices of trade (that is, price of olives in terms of beer) would allow both Switzerland and Greece to gain from trade? Check all that apply.

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

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Suppose that two people, Michelle and James each live alone in anisolated region. They each have the same resources available, andthey grow potatoes and raise chickens. If Michelle devotes all herresources to growing potatoes, she can raise 200 pounds of potatoesper year. If she devotes all her resources to raising chickens, shecan raise 50 chickens per year. (If she apportions some resourcesto each, then she can produce any linear combination of chickensand potatoes that lies between those extreme points. If Jamesdevotes all his resources to growing potatoes, he can raise 80pounds of potatoes per year. If he devotes all his resources toraising chickens, he can raise 40 chickens per year. (If heapportions some resources to each, then he can produce any linearcombination of chickens and potatoes that lies between thoseextreme points.)
what is michelles opportunity cost of producing potatoes
what is michelles opportunity cost of producing chickens
what is james opportunity cost of producing potatoes
what is james opportunity cost of producing chickens
which person has an absolute advantage in which activities.
which person has comparative advantage in potatoes
which person has comparative advantage in chicken
Suppose that they're thinking of each specializing completely inthe area in which they have a comparative advantage, and thentrading at a rate of 2.5 pounds of potatoes for one chicken, wouldthey each be better off? Explain?
How would you extend the above narrative to businesses, society asa whole or nations? Explain

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ECON 101 Chapter Notes - Chapter 8: Comparative Advantage, Opportunity Cost, Absolute Advantage

ECON 101 Full Course Notes

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