Transcript Week 1 Gains from Trade In Class

Gains from Trade
And Specialization
Production is determined by who has the least “relative” cost
Ch. 3
The production possibilities frontier
(b) The farmer’s production
Meat (oz) possibilities frontier
If there is no trade, the farmer
chooses this production and
consumption.
(c) The rancher’s production
Meat (oz) possibilities frontier
24
8
12
4
0
If there is no trade, the
rancher chooses this
production and consumption.
B
A
16
Potatoes (oz)
32
0
24
48
Potatoes (oz)
Panel (b) shows the combinations of meat and potatoes that the farmer can
produce. Panel (c) shows the combinations of meat and potatoes that the rancher
can produce. Both production possibilities frontiers are derived assuming that the
farmer and rancher each work 8 hours per day. If there is no trade, each person’s
production possibilities frontier is also his or her consumption possibilities frontier
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The production possibilities frontier
(a) Production Opportunities
Minutes needed to
Make 1 ounce of:
Farmer
Rancher
Amount produced in
8 hours
Meat
Potatoes
Meat
60 min/oz
20 min/oz
15 min/oz
10 min/oz
8 oz
24 oz
Potatoes Opp Cost
Farmer 1M: 4P
32 oz
Rancher 1M: 2P
48 oz
1oz M
-4P
-2P*
1oz P
-¼ oz M
-½ oz M
a) What is the minimum price that Rancher would want for 1
oz of Meat? (in oz of Potatoes). I.e., what is R’s
opportunity cost of producing 1 oz of Meat?
b) What is the maximum price that Farmer would pay for 1 oz
of Meat? (in oz of potatoes). I.e., what is F’s opp cost of
producing 1 oz of meat ..or what would be F’s “avoided”
cost if she “buys’ the meat?
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Comparative Advantage – in the Real World
Jon Steinsson and Emi Nakamura do not have enough time to do everything they need
to do. They’re recently tenured, highly productive rising stars at Columbia University,
as well as parents to an infant. But they have a secret weapon helping them prioritize:
Econ 101.
One of the oldest, if not entirely intuitive, principles in economics is comparative
advantage, developed by the British economist David Ricardo in the early 19th
century. As introductory econ students all learn, it explains why countries and
companies ought to outsource the production of lower-value goods and services, even
if they can produce them more efficiently themselves.
Even if you’re faster and more effective than everyone else at a given task — fighting
with the cable company, say, or folding your socks just so — you still might be better
off if you pay someone else to do it for you. Why? Because there is an opportunity
cost for every hour
http://www.nytimes.com/2013/11/10/magazine/outsource-your-way-tosuccess.html?_r=0
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