1 / 12

Gains From Trade : Ch.3

Gains From Trade : Ch.3. PPF. Only 2 goods : Guns and Butter Production Possibility Frontier (PPF) shows graphically the trade-off between the two goods. The (negative) slope of the curve is the marginal opportunity cost of one good in terms of the other. guns. guns. A. B. butter.

gurit
Download Presentation

Gains From Trade : Ch.3

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Gains From Trade : Ch.3

  2. PPF • Only 2 goods : Guns and Butter • Production Possibility Frontier (PPF) shows graphically the trade-off between the two goods. • The (negative) slope of the curve is the marginalopportunity cost of one good in terms of the other

  3. guns guns A B butter butter guns C Opportunity Cost: What you give up Constant Marginal Op. Cost Increasing Marginal Op. Cost Decreasing Marginal Op. Cost butter

  4. Opportunity Cost • Price of one thing in terms of what you give up • Example: dollars for bread • $/loaf • Now: guns for butter • #guns/#butter is “price of butter” • Opportunity cost

  5. Example : Constant Op. Cost Absolute Advantage : Lower cost of production (Sam has A.A. in both corn and soy) Comparative Advantage : Lower opportunity cost (cannot have C.A. in both)

  6. PPF John Sam corn corn 12 8 (6c,12s) (4c,6s) 12 soy 24 soy Now, what if they specialize and trade? Answer: they can both be better off.

  7. Say John specialize in corn and Sam in soy, then trade – why this way? • Trade 4 acres of corn for 7 acres of soy

  8. John Sam With Trade both consume beyond PPF Conclusion: Trade is good corn 12 8 (6c,13s) (4c,7s) 12 soy 24

  9. Where did price ratio of 4 corn for 7 soy come from? • Answer: between the two opportunity costs of John and Sam. • John Op. Cost of corn : 3/2 soy • Sam Op. Cost of corn : 2 soy • Between 6/4 and 8/4 is 7/4 • So 7 soy for 4 corn • Does it have to be middle? – No • Exactly where beyond this course, so anywhere

More Related