What did you study last time?

1. CRC Economics

2. What did you study last time? Chapter 2Thinking like Economists I. Some additional economic concepts II. Two basic economic modelsAppendix: Graphs & basic mathematics in introductory Economics CRC Economics

3. What do you study now? Chapter 3Interdependence & gains from trade • A parable for the modern economy • The principle of comparative advantage • Applications of comparative advantage CRC Economics

4. Do you know … • a story about a cattle rancher and a potato farmer? • how to determine who has an edge in the production of a good or service? • who should produce the good or service? • who should specialize in what? CRC Economics

5. Do you know … • why people & countries trade? • how people & countries trade? • what happens when people & countries trade? CRC Economics

6. I. A parable for the modern economy • Assume that in the world there is a simple economy with: • Two people: a cattle rancher and a potato farmer, and • Two goods: meat and potatoes CRC Economics

7. I. A parable for the modern economy • The table below describes the production opportunities of the farmer and the rancher: Minutes Needed toMake 1 Ounce of: Amount Produced in 8 Hours Meat Potatoes Meat Potatoes Farmer 60 min 15 min 8 oz 32 oz Rancher 20 min 10 min 24 oz 48 oz CRC Economics

8. I. A parable for the modern economy • Without trade, the situation is as follows: Farmer Rancher Production & Consumption Meat Potatoes Meat Potatoes 4 oz 16 oz 12 oz 24 oz PPF = CPF CRC Economics

9. I. A parable for the modern economy • Let us draw the production possibilities frontiers for the farmer and the rancher, based upon the given data. • Denote N as the no-trade combinations, P as the production combinations, and T as the after-trade combinations. CRC Economics

10. Production Possibilities Frontiers (PPF’s) Meat (oz) The rancher’s PPF with no-trade combination N. The farmer’s PPF with no-trade combination N. 24 N 12 8 N 4 Potatoes (oz) O 16 24 32 48 CRC Economics

11. I. A parable for the modern economy • With trade, the situation becomes: Farmer Rancher Meat Potatoes Meat Potatoes Production 0 oz 32 oz 18 oz 12 oz Trade Gets 5 oz Gives 15 oz Gives 5 oz Gets 15 oz Consumption 5 oz 17 oz 13 oz 27 oz Gains from trade: Increase in Consumption 1 oz 1 oz 1 oz 3 oz CRC Economics

12. Production Possibilities Frontiers (PPF’s) After-trade consumption combinations No-trade production & consumption combinations With-trade production combinations Meat (oz) 24 P Farmer’s PPF N T 12 Rancher’s PPF 8 N T 4 P Potatoes (oz) O 16 24 32 48 CRC Economics

13. I. A parable for the modern economy • The moral of the story: By specializing in something that each of them does best and trading with one another, both the farmer and the rancher get to have more meat and potatoes to enjoy. CRC Economics

14. II. The principle of comparative advantage • Who has an edge (the absolute advantage—AA) in the production of a good or service? That is the producer: • who is more productive compared to others, i.e. • who can produce the good or service using fewer inputs than others. CRC Economics

15. II. The principle of comparative advantage • Who has the absolute advantage in the production of meat? • The rancher. • Who has the absolute advantage in the production of potatoes? • The rancher. CRC Economics

16. II. The principle of comparative advantage • Why? • The rancher can produce more of both goods than the farmer in 8 hours. Amount Produced in 8 Hours Meat Potatoes Farmer 8 oz 32 oz Rancher 24 oz 48 oz CRC Economics

17. II. The principle of comparative advantage • Who produces the good or service at a lower cost? (or who has the comparative advantage—CA in the production of a good or service?) That is the producer: • who is more efficient than others; • who produces the good or service with lower (opportunity) costs compared to others. CRC Economics

18. II. The principle of comparative advantage • Who has the comparative advantage in the production of meat? • The rancher. • Who has the comparative advantage in the production of potatoes? • The farmer. CRC Economics

19. II. The principle of comparative advantage • Why? • It depends on who can produce what at a lower cost. Amount Produced in 8 Hours (Opportunity) Cost of producing 1 oz of Meat Potatoes Meat Potatoes Farmer 8 oz 32 oz 4 oz of potatoes 1/4 oz of meat Rancher 24 oz 48 oz 2 oz of potatoes 1/2 oz of meat CRC Economics

20. II. The principle of comparative advantage • Who should produce and specialize in what? (Specialization) People/Countries should specialize in: • the goods or services in which they have the comparative advantage, i.e. • the goods or services that they can produce at lower (opportunity) costs, cheaper, compared to others. CRC Economics

21. II. The principle of comparative advantage • The rancher should produce and specialize in meat production. • The farmer should produce and specialize in potato production. • What should Tiger Woods specialize in? • What should Kobe Bryant specialize in? CRC Economics

22. II. The principle of comparative advantage • Why do people & countries trade?(Gains from trade) • Trade allow people & countries to specialize in what they do best, i.e. in activities where they have comparative advantage. • People & countries gain/benefit from specialization and trade. CRC Economics

23. II. The principle of comparative advantage • Why do people & countries trade?(Gains from trade) • Trade allows people & countries to enjoy a greater variety of G&S. • People’s and countries’ consumption possibilities frontier (CPFs) are outside their PPFs. CRC Economics

24. II. The principle of comparative advantage • How do people & countries trade? • People trade by selling and buying G&S. • Countries trade by exporting and importing G&S. CRC Economics

25. II. The principle of comparative advantage • What happens when people & countries trade? • People/Countries benefit from trade. They enjoy more G&S at lower costs. • They face the following tradeoffs: - They must cooperate with one another. - They become dependent on one another for the goods or services. CRC Economics

26. Summary Absolute advantage(AA) Using fewer resources (Being more productive) Comparative advantage(CA) Producing more cheaply, having lower opportunity cost(Being more suited to produce) Specialization(Z) In area/activities withcomparative advantage Trade(T) Buying, importing;selling, exporting Gains from trade(GfT) More G&S to enjoy; CPF > PPF CRC Economics

27. III. Applications of comparative advantage • Should Tiger Woods mow his own lawn? Why? • Should the U.S. trade with other countries? Why? CRC Economics

28. Now you know … • the story about a cattle rancher and a potato farmer. • how to determine who has an edge in the production of a good or service. • who should produce the good or service. • who should specialize in what. CRC Economics

29. Now you know … • why people & countries trade. • how people & countries trade. • what happens when people & countries trade. CRC Economics

30. What did you study this time? Chapter 3Interdependence & gains from trade • A parable for the modern economy • The principle of comparative advantage • Applications of comparative advantage CRC Economics

31. What will you study next time? Chapter 4 Market Forces of Demand & Supply Introduction I. Demand II. Supply III. Market situations IV. Changes in demand & supply CRC Economics

32. See You! Take Care! CRC Economics