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AU / Economics / ECON 200 / Trade makes both sides better off when the price is what?

Trade makes both sides better off when the price is what?

Trade makes both sides better off when the price is what?

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Week 2


Trade makes both sides better off when the price is what?



Trade  

Division of Knowledge  

Trade allows people to specialize, increasing total knowledge available  

Example of Alice and Bob in 2-person society (each able to hold only knowledge  from 2 books), both decide they will be self-sufficient (no trade)

Each only able to hold one book about basic food and one book about basic shelter,  so total knowledge of the whole society is only basic info about food and shelter bc  no trade (total knowledge of a society is only the knowledge of one individual bc no  specialization and sharing of knowledge)

When you introduce trade, Alice can hold one basic and one advanced book about  food and Bob can hold one basic and one advanced book about shelter because  they don’t have to know everything for themselves (same brain capacity, but able  to use it for specialized knowledge bc trade) , now the whole society has a greater  collective knowledge and therefore standard of living as opposed to when everyone  was self-sufficient and had the same knowledge  


What is the opportunity cost ?



A country becomes better the more they trade because it encourages specialization and increases the influx of knowledge (allows people to focus on what they’re good  at and rely on trade and other specialized people to make up for what they’re not  good at)  

Drexel University example (took an exorbitant amount of time to produce one 92%  “local” suit made from materials produced without trade outside Philly, would have  been much more efficient to use money from your job to go to a store and buy a  mass-produced suit instead of wasting all that time and money to produce one  semi-local bad suit, continuation of this “local only” mentality would lead to poverty  in a society)

Comparative advantage  

Bob is faster than Alice at making meat and bread  

Absolute advantage- the ability to produce something using fewer inputs (inputs in  example= minutes, Alive has no absolute advantage and Bob has absolute  advantage with meat and bread)


What is the comparative advantage?



Don't forget about the age old question of What are the basic characteristics of life?

Absolute says Bob should not trade with Alice bc he will lose money, but  comparative advantage is about who can produce the most at the lowest  opportunity cost  

Alice has a comparative advantage in bread and Bob has a comparative advantage  in meat, even though it takes Alice longer to make bread because both sides get  more of each when Bob specializes in meat and Alice specializes in bread and they  trade with one another (lowers the opportunity cost for both, refer to charts in  powerpoint slides)

There is always room for a slower producer bc comparative is not about absolute  advantage and determines what it most effective for an individual or country to  produce

Trade is in your self-interest- simply look at what you can produce the fastest  despite the fact you have the ability to produce other, secondary things (California  and Kansas wheat example) and sell that one thing (specialization), allows people to work with others who may not produce the secondary things as fast bc more net  benefit for both parties ( you don’t have to produce those secondary things and can  put the most focus on the primary item that can make you the most money, you net more overall of your primary/can sell the surplus)

Trade is like technology (raises the overall living standards although some specific  sectors of economy are worse off) because it converts easy to produce goods into  hard to produce goods for a low cost  

Trade makes both sides better off when the price is between the 2 opportunity  costs, that’s how price is calculated  We also discuss several other topics like How do you identify a molecular solid?
Don't forget about the age old question of What are the 3 domains of microorganisms?
If you want to learn more check out Why don't people believe in ns?
Don't forget about the age old question of What are the 5 classifications of matter?
If you want to learn more check out What happens in the autumnal equinox?

As you lower the cost of production for one item, it becomes costlier to produce  something else, you will always have a comparative advantage in something, so it’s always possible to gain from trading

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