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MicroeconomicsLecture 2
Trade-offs, Comparative Advantage, and the Market System
Yabut
Intent
Result
FellPushedJumped
Result the same
Utopia vs. Reality
Reality always loses
Realistic Alternatives
Utility
a measure of happiness or satisfaction
SnickersTest of Utility
Change IncentivesChange Behavior
Speed Camera Lottery
PositiveWhat is
NormativeWhat ought to be
Fact
Values
FactsTrue or False
ValuesGood or Bad
MarketsWhere Buyers and
Sellers Trade
Households
Individuals in a home
Sell Factors of Production
Buy Goods & Services
Firms
Buy Factors of Production
Sell Goods & Services
Product Markets
Markets for finished goods and services
- Stores -
Factor Markets
Markets for goods and services used to make
products
LaborCapitalNatural
ResourcesEntrepreneurs
SpendingWages & Payments
for Factors
Goods & Services
Households
Firms
FactorMarkets
ProductMarkets
Absolute Advantage
Produce more with the same resources
Comparative Advantage
Produce at a lower opportunity cost
David Ricardo(1772 - 1823)
Principles of Political Economy
and Taxation
Comparative Advantage
The basis for trade is comparative advantage,
not absolute advantage.
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
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
Opportunity Cost
The highest valued alternative
Saudi Idaho
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
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
InternalPrice
Dates Potatoes
Idaho 5 Potatoes 1/5 Date
Saudi 1/4 Potato 4 Dates
No Trade Dates Potatoes
Idaho 3 15
Saudi 12 3
Total 15 18
Specialize Dates Potatoes
Idaho 0 30
Saudi 24 0
Total 24 30
Analysis Dates Potatoes
No TradeTotals 15 18
SpecializeTotals 24 30
Gain +9 +12
Trade Dates Potatoes
Idaho 3 to 12 = +9 15
California 12 3 to 15 = +12
Total 24 30
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
Slope
Percentage Change
Relationships
Cause and Effect
Areas
Notation
% Percent
Change
% Percentage Change
% Percentage Change
New - Old
Old
= = .4 = 40%7 - 55
25
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
California Culture
or
Syria Culture
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