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[US trade example: BEA (www.bea.gov)]
Consider two economies (A, B), each endowed with 200 worker-hours. Consider that there are only two goods being produced (X, Y). Consider that in country A the hourly wage is $A10, while in country B it is $B20, for simplicity assume that $A=$B. Table below shows costs in each country:
What can be said about the absolute and comparative advantage principles
in this case?
Productivity and trade (education, physical capital…)
Currency and Trade
Output = f (inputs, technology) = TP
TC (Q) = w L + r K
Other inputs can be included (oil, land… furthermore we assume homogeneous labor and capital)
ATC = AVC + AFC
Change in total cost of change in output
Marginal cost as a function of Marginal product of labor (in our simple case)
In equilibrium, a profit maximizing firm will select to produce the level of output at which the wage rate is equal to the value of the marginal product of labor, in other words the marginal cost of a unit of labor (wage) is equal to the marginal benefit of that unit of labor expressed as the change in total revenues.
Consequences of these assumptions:
- Competition along one dimension – the price
- Lack of collusion
- Horizontal demand and MR – price taking behavior
- MC as the supply curve
Shut down and break even price levels – cost diagram in the short-run
Long-run and cost structure of the industry
Industry Demand Increases
Note that MC, ATC, AVC are all functions of input costs (if labor is the only variable input then: MC = wage/MPL, and AVC = wage/APL)
Increasing Cost Industry it do so?
Decreasing Cost Industry
Constant Cost Industry
Government role in the economy:
Data for 2001, source: World Bank it do so?