Class summary 10/24

Econ 10/24/11

Rochester (0 camera & 10 wine)~( 5 cameras & 0 wine)

Cornell ( 0 camera & 3 wine)~( 4 cameras & 0 wine)

Who’s more “efficient” at making each? Who can produce something at lower cost ( sacrifice less)?

Price is nothing more than a trade off.

Rochester:

Price of 1 camera = price of 2 wine

Price of 1 wine = price of ½ camera

Cornell:

Price of 1 camera = price of ¾ wine

Price of 1 wine = price of 4/3 camera

Rochester has a “comparative advantage” in making wine over Cornell

Cornell has a “comparative advantage” in making camera over Rochester

Nobody can have a “comparative advantage” on everything

WITH TRADE:

                     Rochester                Cornell

Initial:          10 wines                3 wines

                       0 camera               4 cameras

(Rochester give 3 wines for 3 cameras, price of exchange---1 wine per camera)

Final:           7 wines                     3 wines

                      3 cameras               1 cameras

Both PPFs (Production Possibilities Frontier) rotate out.

¾ wine < price of camera < 2 wines                         agreeable price

1/2 camera < price of wine < 4/3 cameras

both people can benefit by being social ( trading with somebody else )

trading is non-technical form of production

* Self-sufficiency is the absolute road of poverty

Two reasons:

1. Everyday we cooperate with others to do daily things( we cannot produce transpirations)

2. We cannot see other things if everyone is specializing in some field and being self-sufficient.

What makes people want to trade? What determines why they trade?

Relative price within the country matters

Restriction on the trade is costly, nothing is free.