ECN 001A Lecture Notes - Lecture 7: Absolute Advantage, Market Power, Demand Curve
LECTURE 7-8: 4/18/18 and 4/20/18
Chapter 3: Interdependence and the Gains from Trade
• Interdependence
o Relying on people around the world to provide with goods and services
• Exports: goods produced domestically and sold abroad
• Imports: goods produced abroad and sold domestically
• Absolute Advantage:
o Ability to produce a good using fewer inputs than another producer
▪ Producer can produce most output or requires the least amount of inputs (resources)
o Ex: US has absolute advantage in wheat: producing a ton of wheat uses 10 labor hours in the UC
vs 25 in Japan
o If each country has an absolute advantage in one good and specializes in that good, then both
countries can gain from trade
• Two Measures of the Cost of a Good
o 2 countries can gain from trade when each specializes in the good it produces at lowest cost
o Absolute advantage measures the cost of a good in terms of the inputs required to produce it
• Opportunity Cost and Comparative Advantage
o Comparative Advantage: ability to produce a good at a lower cost than another producer
▪ Produce with lowest opportunity cost
• Comparative Advantage and Trade
o Gains from trade arises from comparative advantage (differences in opportunity costs)
o When each country specializes in the goods in which it has comparative advantage, total
production in all countries in higher
• SUMMARY
o Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods and
services
o Comparative advantage: being able to produce good at lower opportunity cost
o Absolute advantage: being able to produce good with fewer inputs
Lecture 9: 4/27/18
Chapter 4: The Market Forces of Supply and Demand
• Markets and Competition
o Market: group of buyers and sellers of a particular product
o Competitive Market: one with many buyers and sellers, each has a negligible effect on
price
▪ In a Perfectly Competitive Market:
• All goods are exactly the same
• Buyers and sellers so numerous that no one can affect market price
o Each is a “price taker”
• Demand
o Quantity demanded: amount of the good that buyers are willing and able to purchase
▪ Sum of the quantities demanded by all buyers at each price
o Law of Demand: claim that the quantity demanded of a good falls when the price of the
good rises, other things equal
o Negative relationship: as price rises, demand is lower and vice versa
• The Demand Schedule
o Demand Schedule: a table showing relationship between the price of a good and the
quantity demanded
• Demand Curve Shifters:
o Demand curve shows how price affects quantity demanded, other things being equal
▪ “Other things”: non-price determinants of demand
o Changes in them shift the D curve
o Number of Buyers:
▪ Increase leads to increase of quantity demanded at each price, shifts D curve to
the right
o Income:
▪ Demand for a Normal Good is positively related to income
find more resources at oneclass.com
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ECN 001A Full Course Notes
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Document Summary
Chapter 3: interdependence and the gains from trade. Interdependence: relying on people around the world to provide with goods and services, exports: goods produced domestically and sold abroad. Interdependence and trade allow everyone to enjoy a greater quantity and variety of goods and services: comparative advantage: being able to produce good at lower opportunity cost, absolute advantage: being able to produce good with fewer inputs. Chapter 4: the market forces of supply and demand: markets and competition, market: group of buyers and sellers of a particular product, competitive market: one with many buyers and sellers, each has a negligible effect on price. Other things : non-price determinants of demand: changes in them shift the d curve, number of buyers: Increase leads to increase of quantity demanded at each price, shifts d curve to the right. Income: demand for a normal good is positively related to income.
