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2
The Economic Problem:
Scarcity and Choice
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Comparative Advantage
and the Gains From Trade
Daily Production
Colleen
Bill
Wood
(logs)
Food
(bushels)
10
4
10
8
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Comparative Advantage
and the Gains From Trade
Daily Production
Colleen
Bill
Wood
(logs)
Food
(bushels)
10
4
10
8
In terms of wood:
For Bill, the opportunity cost of 8 bushels of food is 4 logs.
For Colleen, the opportunity cost of 8 bushels of food is 8 logs.
In terms of food:
For Colleen, the opportunity cost of 10 logs is 10 bushels of food.
For Bill, the opportunity cost of 10 logs is 20 bushels of food.
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Comparative Advantage
and the Gains From Trade
Suppose that Colleen and Bill each wanted equal
numbers of logs and bushels of food. In a 30-day
month they (each separately) could produce:
Monthly Production
with No Trade
Daily Production
Wood
(logs)
Food
(bushels)
Colleen
10
10
Bill
A.
Wood
(logs)
Food
(bushels)
Colleen
150
150
Bill
80
80
Total
230
230
B.
2004 Prentice Hall Business Publishing
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Comparative Advantage
and the Gains From Trade
By specializing on the basis of comparative
advantage, Colleen and Bill can produce more of
both goods.
Monthly Production
with No Trade
Monthly Production
after Specialization
Wood
(logs)
Food
(bushels)
Wood
(logs)
Food
(bushels)
Colleen
150
150
Colleen
270
30
Bill
80
80
Bill
240
Total
230
230
Total
270
270
B.
2004 Prentice Hall Business Publishing
C.
Principles of Economics, 7/e
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Comparative Advantage
and the Gains From Trade
To end up with equal amounts of wood and food
after trade, Colleen could trade 100 logs for 140
bushels of food. Then:
Monthly Production
after Specialization
Wood
(logs)
Food
(bushels)
Wood
(logs)
Food
(bushels)
Colleen
270
30
Colleen
170
170
Bill
240
Bill
100
100
Total
270
270
Total
270
270
C.
2004 Prentice Hall Business Publishing
D.
Principles of Economics, 7/e
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Specialization, Exchange
and Comparative Advantage
According to the theory of
competitive advantage,
specialization and free
trade will benefit all
trading parties, even those
that may be absolutely
more efficient producers.
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The production
possibility frontier
curve has a negative
slope, which indicates
a trade-off between
producing one good or
another.
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Point F is desirable
because it yields more
of both goods, but it is
not attainable given
the amount of
resources available in
the economy.
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Economic Growth
Economic growth is an
increase in the total output of the
economy. It occurs when a
society acquires new resources,
or when it learns to produce
more using existing resources.
The main sources of economic
growth are capital accumulation
and technological advances.
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Economic Growth
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Economic Growth
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Economic Growth
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Economic Growth
and the Gains From Trade
By specializing and engaging in trade,
Colleen and Bill can move beyond their
own production possibilities.
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Economic Systems
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Economic Systems
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Economic Systems
In a command economy, a central
government either directly or
indirectly sets output targets,
incomes, and prices.
In a laissez-faire economy,
individuals and firms pursue their
own self-interests without any central
direction or regulation.
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Economic Systems
The central institution of a laissezfaire economy is the free-market
system.
A market is the institution through
which buyers and sellers interact and
engage in exchange.
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Economic Systems
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Economic Systems
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Economic Systems
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Economic Systems
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Mixed Systems,
Markets, and Governments
Since markets are not perfect, governments
intervene and often play a major role in the
economy. Some of the goals of government are to:
Minimize market inefficiencies
Provide public goods
Redistribute income
Stabilize the macroeconomy:
Promote low levels of unemployment
Promote low levels of inflation
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laissez-faire economy
capital
command economy
market
comparative advantage,
theory of
opportunity cost
consumer goods
price
consumer sovereignty
production
economic growth
economic problem
resources or inputs
investment
outputs
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