Econ 202 1st Edition Lecture 4 Outline of Last Lecture I Circular Flow Model A Acters B Transaction C Markets II Production Possibilities Frontier PPF III Example of finding opportunity cost Outline of Current Lecture I Interdependence vs Trade II Absolute Advantage III Comparative Advantage Current Lecture I Interdependence vs Trade Table 1 Meat Potatoes a Table 1 shows the minimum time needed to produce 1oz of meat and potatoes Farmer 60min oz 15min oz i In order to find the amount of meat Rancher 20min oz 10min oz and potatoes produced from the Table 1 you must make the time constant b For our purposes we will make the time 8 Table 2 Meat Potatoes hours so in the Table 2 we will find the Farmer 8oz 32oz amount of meat and potatoes produced in 8 hours for both the farmers and the Rancher 24oz 48oz ranchers i Ex It takes 1hour for the farmer to produce 1oz of meat so in 8hours he will make 8oz of meat ii Ex 2 it takes 10 minutes for the rancher to produce 1 oz of potatoes so in 1 hour he can produce 6 potatoes 6X8 48 oz of potatoes in 8 hours keep doing that until the table is filled out c This graphs Figure 1 and 2 show the amount of meat and potatoes the framer and rancher can produce Figure 1 The Farmer s Production i Point A show the amount of Possibilities Frontier production and consumption the farmer chooses to produce when there is no trading ii Point B show the amount of production and consumption the rancher chooses to produce when there is no trading d Table 3 shows production of meat and Figure 2 The Rancher s Production potatoes for farmer and rancher without trading Possibilities Frontier i Total represent the total production of meat and potatoes without trading e With trade the Production Possibilities Table 3 Meat Potatoes Frontier can rise above the original Farmer 4oz 16oz Production Possibilities Frontier f Table 4 shows production of meat and Rancher 12oz 24oz potatoes for farmer and rancher with trading Total 16oz 40oz i Total represent the total production of Table 4 Meat Potatoes meat and potatoes Farmer 0oz 32oz with trading Get 5oz Gives 15oz ii With Trade The rancher gives the Rancher 18oz 12oz farmer 5oz of Give 5oz Gets 15oz meat and the Total 18oz 44oz farmer gives the rancher 15oz of potatoes shown in the table g With trade consumption will increase look at Table 5 and compare it to Table 3 i Farmers meat consumption increases by 1oz ii Farmers potatoes consumption Table 5 Meat Potatoes increases by 1oz iii Rancher meat consumption Farmer 5oz 17oz increases by 1 Rancher 13oz 27oz iv Rancher potatoes consumption increases by 3oz 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 h Always going to be better with trade except when you only want to produce one of the products II III Absolute Advantage a Absolute Advantage When one person country can produce a unite of service commodity with fewer inputs than the other person country we say that the former has an absolute advantage in production of that service commodity i Not relevant to trade analysis Comparative Advantage a Comparative Advantage focuses on opportunity cost of an ounce of potatoes i Farmer 16oz of potatoes 4oz of Table 3 Meat Potatoes meat 1 Divide both sides by 16 Farmer 4oz 16oz so you get how much Rancher 12oz 24oz meat is needed to produce 1oz potato Total 16oz 40oz 2 You get 1oz of potato oz of meat ii Rancher 12oz of potatoes 24oz of meat 1 Divide both sides by 12 so you get how much meat is needed to produce 1oz potato 2 You get 1oz of potato 2oz of meat iii In this case the farmer has the comparative advantage in making potatoes because he will only be losing oz of meat for every potato while the rancher loses 2oz of meat for every potato b How about the opportunity cost of an ounce of meat i Farmer 4oz of meat 16oz of potatoes 1 Divide both sides by 4oz so you get how much potatoes are needed to produce 1oz meat 2 You get 1oz of meat 4oz of potatoes ii Rancher 24oz of meat 12oz of potatoes 1 Divide both sides by 24 so you get how much potatoes are needed to produce 1oz meat 2 You get 1oz of meat oz of potatoes iii In this case the rancher has the comparative advantage in producing meat because he will only be losing oz of potatoes for every ounce of meat while the farmer loses 4oz of potatoes for every ounce of meat produced 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 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