ECON 1100 1st Edition Lecture 2Outline of Current LectureAbsolute Advantage Review -Comparative AdvantageCurrent LectureAbsolute Advantage The ability of a party to produce a larger number of a good product or service than competitors while using the same amount of resources Comparative Advantage Occurs when one producer is able to produce a good at a lower opportunity cost than another producer Farmer can produce 8 oz. of meat and 32 oz. of potatoes Opportunity Cost (opposite/good): 1 oz. potatoes = 1/4 oz. meat OR 1 oz. meat = 4 oz. potatoes Rancher produce 24 oz. of meat and 48 oz. of potatoes These 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.Rancher has absolute advantage for meat and potatoes Opportunity Cost (opposite/good): 1 oz. potatoes = 1/2 oz. meat OR 1 oz. meat = 2 oz. potatoes Farmer comparative advantage in production of potatoes (i.e. 1/4 < 1/2) and the rancherhas comparative advantage in production of meat (i.e. 2 < 4) Suppose terms of trade for the rancher and farmer are as followed: 1 oz. potatoes = 1/3 oz. meat OR 1 oz. meat = 3 oz. potatoes Bound between the two opportunity costs so beneficial for both parties Potatoes - Farmer opportunity cost: 1/4 oz. meat • 1/3 oz. meat from trade: 4 oz. meat Rancher opportunity cost: 1/2 oz. meat • 1/3 oz. meat from trade: 2 oz. meat What if the terms of trade change?As the terms of trade move closer to the farmer’s opportunity’s cost (i.e. 5/15 -> 5/16), there farmer gains less than before the changes The rancher gains more than before the changes If it moves to 5/17, the farmer would be better off because he then gains another oz. of meat, which is more valuable that