101 lecture 2
TRANSCRIPT
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MicroeconomicsLecture 2
Trade-offs, Comparative Advantage, and the Market System
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Yabut
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Intent
Result
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FellPushedJumped
Result the same
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Utopia vs. Reality
Reality always loses
Realistic Alternatives
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Utility
a measure of happiness or satisfaction
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SnickersTest of Utility
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Change IncentivesChange Behavior
Speed Camera Lottery
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PositiveWhat is
NormativeWhat ought to be
Fact
Values
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FactsTrue or False
ValuesGood or Bad
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MarketsWhere Buyers and
Sellers Trade
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Households
Individuals in a home
Sell Factors of Production
Buy Goods & Services
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Firms
Buy Factors of Production
Sell Goods & Services
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Product Markets
Markets for finished goods and services
- Stores -
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Factor Markets
Markets for goods and services used to make
products
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LaborCapitalNatural
ResourcesEntrepreneurs
SpendingWages & Payments
for Factors
Goods & Services
Households
Firms
FactorMarkets
ProductMarkets
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Absolute Advantage
Produce more with the same resources
Comparative Advantage
Produce at a lower opportunity cost
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David Ricardo(1772 - 1823)
Principles of Political Economy
and Taxation
Comparative Advantage
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The basis for trade is comparative advantage,
not absolute advantage.
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Gale AliTotal
Hours
Make a Hook
Catch a Fish
TotalHours
3 2 5
4 1 5
7 3 10
No Trade2 Hooks and 2 Fish
10 Hours - 5 Hours per Fish
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Gale AliTotal
Hours
Make a Hook
Catch a Fish
TotalHours
2 hooks6 hours
6
2 fish2 hours
2
6 2 8
With Trade2 Hooks and 2 Fish
8 Hours - 4 Hours Per Fish
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Opportunity Cost
The highest valued alternative
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Saudi Idaho
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Dates Potatoes
24 0
20 1
16 2
12 3
8 4
4 5
0 6
Ratios24 to 6
4 Dates for 1 Potato6 to 24
1/4 Potato for 1 Date
Dates Potatoes
6 0
5 5
4 10
3 15
2 20
1 25
0 30
Ratios6 to 30
1/5 Dates for 1 Potato30 to 6
5 Potatoes for 1 Date
Saudi Arabia Idaho
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24
30
6
6 Potatoes15
12
3
3
9
15
18
21
9 12 18 21 24 2700
27
Should Idaho and Saudi Trade?Dates
SaudiPPF
IdahoPPF
Dates Potatoes
6 0
5 5
4 10
3 15
2 20
1 25
0 30
Dates Potatoes
24 0
20 1
16 2
12 3
8 4
4 5
0 6
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InternalPrice
Dates Potatoes
Idaho 5 Potatoes 1/5 Date
Saudi 1/4 Potato 4 Dates
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No Trade Dates Potatoes
Idaho 3 15
Saudi 12 3
Total 15 18
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Specialize Dates Potatoes
Idaho 0 30
Saudi 24 0
Total 24 30
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Analysis Dates Potatoes
No TradeTotals 15 18
SpecializeTotals 24 30
Gain +9 +12
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Trade Dates Potatoes
Idaho 3 to 12 = +9 15
California 12 3 to 15 = +12
Total 24 30
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24
30
6
6 Potatoes15
12
3
3
9
15
18
21
9 12 18 21 24 2700
27
Should Idaho and Saudi Trade?Dates
SaudiPPF
IdahoPPF
TradePPF
Idaho gains
9 Dates
California gains 12
potatoes
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Slope
Percentage Change
Relationships
Cause and Effect
Areas
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Notation
% Percent
Change
% Percentage Change
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% Percentage Change
New - Old
Old
= = .4 = 40%7 - 55
25
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Last year the price was $6. This year the price is $9. What is the percentage change?
New - Old Old
= = .5 = 50%9 - 66
36
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California Culture
or
Syria Culture