EECS 1019 Lecture Notes - Lecture 15: Perfect Competition, Comparative Advantage
15 Jun 2018
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EECS 1019 Lecture 15 Notes
Introduction
Imperfect Markets Theory
• A country that specializes in some products may not produce other products, so trade
between countries is essential.
• This is the argument made by the classical theory of comparative advantage.
• Comparative advantages allow firms to penetrate foreign markets.
• Many of the Virgin Islands, for example, specialize in tourism and rely completely on
international trade for most products.
• Although these islands could produce some goods, it is more efficient for them to
specialize in tourism.
• That is, the islands are better-off using some revenues earned from tourism to import
products than attempting to produce all the products they need.
• If eah outry’s arkets ere losed to all other outries, the there ould e o
international business.
• At the other extreme, if markets were perfect and so the factors of production (such as
labor) were easily transferable, then labor and other resources would flow wherever
they were in demand.
• Such unrestricted mobility of factors would create equality in both costs and returns and
thus would remove the comparative cost advantage, which is the rationale for
international trade and investment.
• However, the real world suffers from imperfect market conditions where factors of
production are somewhat immobile.
• There are costs and often restrictions related to the transfer of labor and other
resources used for production.
• There may also be restrictions on transferring funds and other resources among
countries.
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