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Farmers vs. Ranchers

Farmers vs. Ranchers. This half of the room = farmers. This half of the room = ranchers. You have 8 hours of labor you can put in a day. You can produce 1 oz. of potatoes in 10 minutes. You can produce 1 oz. of meat in 20 minutes Draw your PPF for a day of labor.

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Farmers vs. Ranchers

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  1. Farmers vs. Ranchers This half of the room = farmers This half of the room = ranchers You have 8 hours of labor you can put in a day. You can produce 1 oz. of potatoes in 10 minutes. You can produce 1 oz. of meat in 20 minutes Draw your PPF for a day of labor. • You have 8 hours of labor you can put in a day. • You can produce 1 oz. of potatoes in 15 minutes. • You can produce 1 oz. of meat in 60 minutes. • Draw your PPF for a day of labor.

  2. Why does trade make us better? It allows an individual to specialize in doing what he/she does best.

  3. Trade and Specialization Why did the farmer produce only potatoes when the rancher was better at doing both that and producing ground beef (I learn from my mistakes!)

  4. Absolute Advantage • What happens when we compare the inputs needed by each to produce an oz. of each product? • The Rancher could make both products with fewer inputs

  5. Absolute Advantage The ability to produce a good using fewer inputs than another producer is ABSOLUTE ADVANTAGE.

  6. Comparative Advantage • What was the Farmer’s Opportunity Cost of producing 1 extra oz. of potatoes? • ¼ an oz. of ground beef • What was the Rancher’s Opportunity Cost of producing 1 extra oz. of potatoes? • ½ an oz. of ground beef THE RANCHER HAS A HIGHER OPPORTUNITY COST FOR PRODUCING POTATOES!

  7. Comparative Advantage • What was the Farmer’s Opportunity Cost of producing 1 extra oz. of ground beef? - 4 oz. of potatoes • What was the Rancher’s Opportunity Cost of producing 1 extra oz. of ground beef? - 2 oz. of potatoes THE FARMER HAS A HIGHER OPPORTUNITY COST FOR PRODUCING GROUND BEEF!

  8. Comparative Advantage The ability to produce a good at a lower opportunity cost than another producer is COMPARATIVE ADVANTAGE.

  9. Worksheet • Assuming the two countries have identical resources, the United States has an absolute advantage in __________. • Portugal has an absolute advantage in __________.

  10. Worksheet • Assuming the two countries have identical resources, the United States has an absolute advantage in Wine and Textiles. • Portugal has an absolute advantage in NOTHING.

  11. Worksheet • The United States has a comparative advantage in __________. • Portugal has a comparative advantage in ___________.

  12. Worksheet • The United States has a comparative advantage in Wine. • Portugal has a comparative advantage in Textiles.

  13. Activity • First step: • Draw your own PPF curve • Identify your opportunity cost for making each good • Second step: • Who has an absolute advantage for each product? • Who has a comparative advantage for each product? • Third Step: • Work out the terms of your trade! • Your goal is to make everyone better off than they were before trading, while consuming both goods.

  14. Activity • Second step: • Who has an absolute advantage for each product? • Who has a comparative advantage for each product?

  15. Activity • Third Step: • Work out the terms of your trade! • Your goal is to make everyone better off than they were before trading, while consuming both goods. • Tell me what each of you will be producing and consuming after trade.

  16. Activity • Fourth Step: • Create a combined PPF curve showing your production and consumption after trade

  17. Why does trade sometimes not work? • What determines the price at which trade takes places? • How are the gains from trade shared between the parties?

  18. Why does trade sometimes not work? • What determines the price at which trade takes places? • How are the gains from trade shared between the parties? • These questions will be answered at a later date!

  19. Why does trade sometimes not work? For now, remember this general rule: • For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs

  20. Why does trade sometimes not work? For example: With the Ranchers and Farmers • The exchange was 5 oz. of meat for 15 oz. of potatoes • That is a rate of 3 oz. of potato for 1 oz. • That price is between the two opportunity costs: • Farmer’s opportunity cost was 4 oz. of potato for 1 oz. of meat • Rancher’s opportunity cost was 2 oz. of potato for 1 oz. of meat

  21. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Is this an example of an input problem or output problem? What are we looking at…resources going into production or the final product?

  22. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Is this an example of an input problem or output problem? This is an output problem. It shows how much output each producer can create with a given amount of labor (resource).

  23. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Anna’s opportunity cost of producing a unit of potatoes is _____ units of cabbage.

  24. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Anna’s opportunity cost of producing a unit of potatoes is 2 units of cabbage.

  25. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Barry’s opportunity cost of producing a unit of potatoes is _____ units of cabbage.

  26. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Barry’s opportunity cost of producing a unit of potatoes is 1.25 or 5/4 units of cabbage.

  27. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Anna’s opportunity cost of producing a unit of cabbage is ____ units of potatoes.

  28. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Anna’s opportunity cost of producing a unit of cabbage is 0.5 units of potatoes.

  29. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Barry’s opportunity cost of producing a unit of cabbage is 0.8 units of potatoes.

  30. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Who has the comparative advantage in producing potatoes? Anna’s opportunity cost = 2 Barry’s opportunity cost = 1.25

  31. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Who has the comparative advantage in producing potatoes? Barry – his opportunity cost is lower than Anna’s.

  32. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Who has the comparative advantage in producing cabbage? Anna’s opportunity cost – 0.5 Barry’s opportunity cost – 0.8

  33. Worksheet Anna and Barry can grow the following amounts of potatoes and cabbage with a week of labor Who has the comparative advantage in producing cabbage? Anna, her opportunity cost is lower than Barry’s

  34. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Is this an example of an input or output problem?

  35. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Is this an example of an input or output problem? Output problem (the fixed resource is their time)

  36. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Henry’s opportunity cost of catching 1 bass is ______ catfish. John’s opportunity cost of catching 1 bass is _____ catfish.

  37. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Henry’s opportunity cost of catching 1 bass is 1.5 or 3/2 catfish. John’s opportunity cost of catching 1 bass is .5 or 1/2 catfish.

  38. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Henry’s opportunity cost of catching 1 catfish is _____ bass. John’s opportunity cost of catching 1 catfish is ______ bass.

  39. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Henry’s opportunity cost of catching 1 catfish is 0.67 bass. John’s opportunity cost of catching 1 catfish is 2 bass.

  40. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Who has the comparative advantage in catching bass? Henry’s opportunity cost – 1.5 catfish John’s opportunity cost – 0.5 catfish

  41. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Who has the comparative advantage in catching bass? John – again his opportunity cost is lower than Henry’s for catching bass.

  42. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Who has the comparative advantage in catching catfish? Henry’s opportunity cost – 0.67 John’s opportunity cost - 2

  43. Worksheet Henry and John are fisherman who catch bass and catfish. This chart shows how many of each type of fish they can catch in one day Who has the comparative advantage in catching catfish? Henry – his opportunity cost is lower than John’s.

  44. Worksheet Is this an example of an input or output problem? Are we looking at the resources or the finished product? This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

  45. Worksheet Is this an example of an input or output problem? This is an input problem. The resources are the number of days it takes to make the finished product. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

  46. Worksheet ABC’s opportunity cost of producing a unit of cars is ____ units of planes. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

  47. Worksheet XYZ’s opportunity cost of producing a unit of cars is ____ units of planes. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

  48. Worksheet XYZ’s opportunity cost of producing a unit of cars is 1.25 units of planes. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

  49. Worksheet ABC’s opportunity cost of producing a unit of planes is _____ units of cars. This chart shows how many days it takes the ABC Corporation and the XYZ Corporation to produce one unit of cars and one unit of planes

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