 I will give every student in the room $10.  Sarah has to pay me $300.  Will you play?

 Economies are defined by scarcity.  Scarcity forces people to make choices.  Choices involve costs.  Since we all face different costs, by specializing and trading we can create wealth.  Markets form to facilitate trade.

 We consider the simplest possible economy.  There is one actor, Robinson Crusoe.  There is one resource, Time.  Since Robinson can only work eight hours in a day, he is faced with scarcity.  Scarcity forces Robinson to make costly choices.

 Since Robinson has limited resources, he cannot have unlimited amounts of fish or palms.  If Robinson spends time fishing it is time he cannot spend palming.  In an hour Robinson can catch two fish or cut four palm leaves.  So, two fish cost four palms.  The opportunity cost of one fish is two palms.  Let’s put it in a table.

 We can see that scarcity forces people to make choices.  Since choosing is refusing, choices are costly.  The “true” cost of any choice is the opportunity cost.

 For Friday ◦ Food Every hour Friday spends fishing yields two fish. ◦ Shelter Every hour Friday spends cutting down palm leaves yields eight leaves. Friday is a better palmer because of a superior tree climbing technique. tree climbing

 In an hour Friday can catch two fish or cut eight palm leaves.  So, two fish cost eight palms.  The opportunity cost of one fish is four palms.  Let’s put it in a table.

 We can see that scarcity forces people to make choices.  Since choosing is refusing, choices are costly.  The “true” cost of any choice is the opportunity cost.

 Although Robinson and Friday have similar resources, they face different costs.  Robinson is the low cost producer of Fish.  Friday is the low cost producer of Palms. Remember, cost is always measured in terms of Opportunity Costs.

 We say someone has a “Comparative Advantage” if they can produce a good at a lower relative cost compared to someone else.

 Robinson, offers to trade fish for palms: 1F for 3P  Will Robinson Trade?  Will Friday Trade?

 What effect does this trade have on Robinson’s and Friday’s level of consumption?

 BOTH Robinson and Friday are OUTSIDE their PPF.

, wealth increases  When people specialize in their comparative advantage, and trade in markets for other goods, wealth increases.  Notice that no extra resources are used.  Using the Low-Cost Producer conserves scarce resources. REDUCES  Specialization and Trade REDUCES scarcity!

Do what you do best, trade for the rest!

Is expanding international trade a good thing or a bad thing? It Depends! Opportunity Cost

Opening Markets Creates Wealth

World map showing countries above and below the world GDP (PPP) per capita, currently $10,500. Source: CIA World Factbook. ██ above world GDP (PPP) per capita ██ below world GDP (PPP) per capita

Choose a bright future!

Most nations are not self-sufficient. It is actually better for countries to specialize in some products and trade for others. This can be understood by looking at absolute and comparative advantage. absolute advantage – A person or nation has an absolute advantage when it can produce more of a given product than another person or nation using a given amount of resources.

absolute advantage opportunity costs Carlos has an absolute advantage over Jenny in producing both T-shirts and birdhouses. However, their opportunity costs are different. – How many T-shirts can Carlos make in the time it takes Jenny to make 5 T- shirts?

comparative advantage A country has a comparative advantage in the product that it can produce most efficiently given all the products it could choose to produce. the law of comparative advantage opportunity cost According to the law of comparative advantage, each person should produce the good for which he or she has a lower opportunity cost. – Comparative advantage also mutually benefits both parties.

Cooking Cleaning BarbieKen 10 min 20 min 40 min 30 min Totals 30 min 70 min

 Working Independently Barbie Produces a Meal in 30 Minutes Ken Produces a Meal in 70 Minutes Absolute Advantage  Barbie Has An Absolute Advantage  Would Barbie Produce Two Meals?  With Trade/Cooperation Barbie Spends 20 Minutes Cooking Ken Spends 60 Minutes Cleaning They Both Gain! They Both Gain!

 Goods are Produced at Least Cost When People Specialize According to the Principle of Comparative Advantage  Lesson - Don’t Try to Do Everything; It is Not Efficient  Trade Between Countries Creates Wealth Ex. Ken and Barbie Have Time for Other Activities

1. Which nation has an absolute advantage in producing CDs? 2. Which nation has an absolute advantage in producing beef? 3. Which nation has a comparative advantage in producing CDs? 4. Which nation has a comparative advantage in producing beef? 5. Should Japan specialize in CDs or beef? 6. Should Canada specialize in CDs or beef? Kobe beefMassage