ECO 105 1nd Edition Lecture 3Outline of Last Lecture I. Introduction to economic modelsII. Model #1a. Storyb. Principlesc. Diagramd. Definition/Probleme. Real GDPf. Economic Growthg. Individual ChoiceOutline of Current Lecture I. Model #2a. Questionb. Storyc. Definitiond. Opportunity cost relatione. Gains from tradeCurrent LectureI. Comparative Advantagea. How does comparative advantage and specialization lead to gains from trade? (Even when absolute advantage exists)b. Storyi. Two individuals/economies in a world of two goodsii. Produce computer softwareThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.iii. Opportunity cost tableOpportunity cost Bill Gates John MacAfee∆Anti/∆OS = 1 OS (60-0)/(30-0) = 2 Anti/OS120/40 = 3 Anti/OS∆OS/∆Anti = 1 Anti 1/2 OS/Anti 1/3 OS/Antic. What is comparative advantage? i. Comparative advantage in the production of goods resides with the individual/economy with the lower opportunity cost1. Who has comparative advantage in the production of (a) operating systems (b) antivirus software?a. Bill Gates because the opportunity cost is lower (2 < 3)b. John MacAfee because the opportunity cost is lower (1/2 < 1/3)d. Opportunity cost doesn’t have to do with amount of production for thisi. If you compare the amount of production, John MacAfee produces more OS than Bill Gates in this example, but the opportunity cost for him is higher, so they aren’t related in this typee. In order to illustrate gains from trade, we will use production/consumption levelsfor each individual/economy10 OS * 2 Anti/Os = 20 Anti60 – 20 = 40W/o trade With tradeProduction Consumption Production ConsumptionBill Gates OS 10 10 30 13Anti 40 40 0 42JohnMacAfeeOS 15 15 0 17Anti 75 75 120 78With trade production column =