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Elasticity of Markets Part 2, Comparative and Absolute Advantage

by: Chip Brothers

Elasticity of Markets Part 2, Comparative and Absolute Advantage ECON 201

Marketplace > University of Tennessee - Knoxville > Economics > ECON 201 > Elasticity of Markets Part 2 Comparative and Absolute Advantage
Chip Brothers

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About this Document

These cover everything that will be on the exam and explain concepts very simply
Intro to Economics
Dr. Ken Baker
Class Notes
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This 8 page Class Notes was uploaded by Chip Brothers on Tuesday October 4, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Dr. Ken Baker in Fall 2016. Since its upload, it has received 4 views. For similar materials see Intro to Economics in Economics at University of Tennessee - Knoxville.


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Date Created: 10/04/16
Finding Total Revenue Graphically Elasticity of Demand and Total Revenue Total revenue depends on both P and Q D • Since P and Q aDe negatively related they always move in the opposite direction • That is, if P increases, then D decreases • Therefore, they have opposing effects on TR… Is there any way to predict if TR will ↑ or ↓ when P changes? Elasticity of Demand Along a Linear Demand Curve What does that mean in terms of elasticity along a linear demand curve?  Along a linear demand curve, the slope is constant, but elasticity changes along the way Comparative and Absolute Advantage Beginning Story You and Kim Kardashian are shipwrecked an island • Only lobster and coconuts to eat Suppose that in a typical week: • You can catch 10 lobsters or gather 30 coconuts or some combination • Kim can catch 4 lobsters or gather 20 coconuts or some combination Should you work with Kim to help each other survive? • Or will she bring you down and you both slowly starve to death? Production Possibility Frontiers Absolute Advantage When a person (country) is more productive than another person (country) • A comparison of productivities across people (countries) • You have the absolute advantage in lobsters • You can catch more lobsters than Kim in the same week • 10 to her 4 You have the absolute advantage in coconuts • You can gather more coconuts than Kim in the same week • 30 to her 20 Kim K has the absolute advantage in nothing Should You Trade? Should you trade with Kim K? • On the surface, answer seems an obvious no • On the surface, Kim K seems basically worthless Let’s frame the situation in a different way • How much does 1 lobster cost you to catch? • How much does 1 lobster cost Kim to catch? • How much does 1 coconut cost you to gather? • How much does 1 coconut cost Kim to gather? Your Opportunity Cost • Wof your PPF?lope • Answer: -3 • What does that mean? • Answer: it means you catch costster you 3 coconuts In the amount of time it takes you to catch a lobster, you could have gathered Kim’s Opportunity Cost • What is the slope of Kim’s PPF? • Answer: -5 • What does that mean? • Answer: it means that every lobster Kim caught cost her 5 coconuts In the amount of time it takes Kim to catch a lobster, she could have gathered 5 coconuts Summary of Opportunity Costs Kim:  1 lobster costs 5 coconuts  1 coconut costs 1/5 lobster You:  1 lobster costs 3 coconuts  1 coconut costs 1/3 coconuts Comparative Advantage When one person (or country) can produce a good at a lower cost than the other person/country A comparison of the opportunity costs between individuals or countries • You have the comparative advantage in lobsters • You lose fewer coconuts than Kim when catching lobsters • Kim has the comparative advantage in coconuts • She loses fewer lobsters than you when gathering coconuts Trade Rates • Let you catch lobster and Kim gather coconuts • Trade with each other at the end of the week • But how many lobsters for how many coconuts? • How many lobsters should you give Kim and how many coconuts should she give you? • Goal: We want both parties to gain Trade Rates: Price of a Lobster You have the • To make yourself better off, you comparative advantage need to charge in lobsters • To make herself better off, Kim wants to pay less than her cost 1 Lobster cost you 3 coconuts Therefore, 1 lobster should trade 1 lobster costs Kim 5 for between 3 and 5 coconuts coconuts You want to ‘sell’ lobsters Trade Rates: Price of a Coconut Kim has the • To make herself better off, Kim needs in coconuts advantage to charge a price higher than the cost • To make yourself better off, you want 1 coconut costs Kim 1/5 to pay less than your cost 1 coconut costs you 1/3 Therefore, 1 coconut should trade for between 1/3 and 1/5 lobsters Kim wants to ‘sell’ coconuts Propose a Trade 1 lobster for 3 ___ 5 1 coconut for 1/5 ___ 1/3 coconuts lobsters How about 1 lobster for 4 How about 1 coconut for coconuts? 1/4 lobsters? When we get one side, This will always satisfy we just flip it to get the both bounds - other side mathematically it has to How about 16 coconuts for 4 lobsters Where Do We End Up After Trade? Before trade:  You: 10 lobsters, 0 coconuts  Kim: 0 lobsters, 20 coconuts After Trade:  You: 6 lobsters, 16 coconuts  Kim: 4 lobsters, 4 coconuts Are you BOTH better off? Production Possibility Frontier Big Idea In Economics! Trade depends on comparative advantage • NOT absolute advantage • It doesn’t matter who can make more, but who can make it cheaper Trade rate depends on the opportunity costs • In order to help both parties, the rate must lie somewhere between the costs Trade means more of all goods because of specialization • this means we produce what we do best • thus making the most possible with our available resources


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