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V. Answer the following questions:

  1. What is exchange?

  2. What is specialization?

  3. Why do exchange and specialization increase individual well-being?

A. Are exchange and specialization the bases of economic activity for any society?

  1. In what sense does exchange make an economy better-off?

  2. What do gains from exchange and specialization depend on?

  3. What does specialization imply?

VI. Define the terms:

market economy exchange

better-off specialization

explicit intention incentive

preference relative prices

VII. Translate into English:

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HMU,TB3 6yfle 3MiHK)BaTHCfl 3i 3MJHaMM y BiAHOCHHX ujnax.

VIII. Read and dramatize the following dialogue:

A.: We've discussed already exchange and specialization and now let's proceed with relative prices and their role in exchange and specialization.

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5 - 129

S.; Surely. Prices are among the most visible characteristics of an economy. What is a relative price by the way!

A.: The relative price of a commodity is defined as the ratio at which one good exchanges for another good. That is, a relative price is the amount of one good an individual must give up if he chooses to consume one unit of another good.

B.: As far as I understood, the relative price of a good is the amount of some other good that must be given up to get an additional amount of the first good.

A.: Yes, sure. For example, if shirts are priced at twenty-four dollars and oranges at two dollars per pound, the relative price of a shirt is twelve pounds of oranges or, conversely, the relative price of a pound of oranges is one-twelfth of a shirt.

B.: Would the relative price be the same if a shirt, for example, costs twenty-four French francs and oranges sell for two francs per pound?

A.: Yes, it would be the same. Relative prices do not depend upon what an economy calls its money or even if it has money. Relative prices depend only upon the willingness of individuals to trade one good for another although money may facilitate these trades.

B.; Are relative prices closely related to opportunity costs?

A.; Indeed, once Crusoe finds that he is not alone on the island, his production costs may be determined by the availability of resources, effort and technology; but his opportunity costs of producing and consuming are de­termined by the relative price of coco-nuts and palm leaves.

B.: Oh, I remember this story. If I am not wrong, his opportunity costs are determined by the ratio at which palm leaves and coco-nuts exchange when he and Friday trade.

A.: You're quite right. Now I see you caught the main idea concerning relative prices.

B.: I'm very much obliged to you for your explanation.

A,: Not at all.

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