2.3 Comparative Advantage

Absolute advantage – being able to do something using fewer resources than other producers require

Law of comparative advantage – the worker with the lower opportunity cost of producing a particular output should specialize in that output

Specialization – when individual workers focus on single tasks

Gains from specialization:

-More efficient and productive

-Absolute advantage focuses on who used the fewest resources, comparative advantage focuses on what else those resources could have produced

Exchange:

-Barter – system of exchange in which products are traded directly for other products

-Money – medium of exchange

Most people consume little of what they produce and produce little of what they consume! Division of labor – sorts the production process into tasks to be carried out by separate workers. Drawbacks of specialization (Figure 2.2)

Conclusion

An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.

The resources in an economy are not all perfectly adaptable. Law of increasing opportunity cost – each additional increment of one good requires the economy to give up larger increments of other good. The PPF has a bowed-out shape due to the law of increasing opportunity cost

Control questions:

1. What does mean economic system?

2. What kind of economic system do you know?

3. What do you know about traditional economic system?

4. What do you know about production possibilities frontier

5. Can you give more information about law of comparative advantage?

Literature:

1. English for economists and managers: textbook/ O. V. Ulyanov, S. V. Grishin; yurginskiy technological Institute. – Tomsk: Publishing house of Tomsk Polytechnic University-theta, 2011. – 111 p.

2. Besanko D.A, Brauetugam R.R, Gibbs M.J Microeconomics,2011, Chicago

3. Griffiths A, Wall S.Economics for business and management,2011, England

4. Varian H.R. Intermediate microeconomics,2010, University of California at Berkeley

5. Boyd, W. Harper. Marketing Management.- Boston, 2010

3. Laws of market economy

The purpose: Solve and review the basic laws of market economy

Key words: market equilibrium, theory of demand, theory of supply, government intervention, individual demand, prices, sellers, outputs

Questions:

3.1 Theory of Demand

3.2 Theory of Supply

3.3 Market Equilibrium

3.4 Government Intervention in the Market

3.1 Theory of Demand

Demand for a commodity

• Depends on size of the market (Industry Demand for the commodity)

• Summation of Individual level Demand

Related to Consumer Choice Theory

Consumer Demand Theory Q_d= f (P_x, I, P_y,T)

Individual Demand

How are price and demand related for a good? (law of demand)

-Normal Goods

-Inferior Goods

Example: Suzuki Mehran

Effect of price of substitute and complementary goods. Effect of Change in Income and Tastes

Market Demand

Horizontal Summation of Individual Demand Curves. Negatively sloped, why? Inverse relation between price and quantity QD= F(Px, I, N, Py, T)

Bandwagon Effect and Snob Effect

Change in demand

Change in quantity Demanded

Demand Faced by A Firm

• Monopolist

  • WAPDA

• Perfect Competition

  • No true example exists (Small scale farmers producing homogeneous wheat in USA)

  • Horizontal demand curve, why?

• Oligopoly

  • Few firms with standardized or differentiated product

• Monopolistic Competition

  • Heterogeneous and differentiated products

• Factors effecting Demand

Advertising, Promotional Policies, Price expectations

• Firms selling durable goods face more volatile & unstable demand. Like automobiles, washing machines, water geezers

• Why? Consumers can wait for Availability of credit, or growth in economy

• Demand function faced by a firm

Q_D= a₀+a₁P_x +a₂I+a₃N+a₄P_y+ a₅T……………

• “a” is coefficient to be estimated with regression analysis

• Implications of estimated demand:

  • Types of inputs

  • Quantity of Inputs