EC 201 Study Guide - Final Guide: Predatory Pricing, Externality, Free Rider Problem
Document Summary
More beneficial to specialize and trade than try to be self sufficient. Shirtville can produce 3x as many shirts as chips (oc of 1 chip=3 shirts) Attempt to be self-sufficient at points a and b. To figure out which good to specialize in, you have to choose the one with the lower opportunity cost (comparative advantage) Note: absolute advantage doesn"t matter in trade. Chipland has a lower opportunity cost in making chips than shirtville does, so they have a comparative advantage in chip making. Shirtville has a lower opportunity cost in shirtmaking ( vs. 1), so they have a comparative advantage, they should specialize in that. Terms of trade- the rate at which units od one product can be exchanged for units of another product. The potential for mutually beneficial trade between the two countries is possible because of willingness to pay exceeds willingness to accept.
