Gains from Specialization

Suppose France and the U.S. both specialize in production according to their respective comparative advantages ..........

France produces wine and the U.S. produces cheese; thus, both countries now "specialize" in production.


Now, production information should look like this:

France --- 10 wine, 0 cheese

U.S. --- 0 wine, 20 cheese

After specialization, total world output equals 30 units of both goods (instead of 27); thus, clearly a gain in production!

ANSWERS to absolute & comparative advantage questions .....

1. U.S.; U.S.; the U.S. outproduces France in both goods
2. France; U.S.; the country that sacrifices the least will have comparative advantage
3. France
4. U.S.
5. The country with comparative (i.e., relative) advantage in production should produce that good


Need more of an explanation?

1. Who has absolute advantage in wine? 10>5 so, the U.S.
Who has absolute advantage in cheese? 10>2 so, the U.S.
Why? U.S. outproduces France in both goods.

2. Who has comparative advantage in wine? France, because it sacrifices less cheese than the U.S. when it produces wine.

Think of it this way .......
In France, producing 1 unit of wine is the loss of only 0.4 units of cheese; whereas, in the U.S., producing 1 unit of wine is the loss of 1 unit of cheese. Since France sacrifices less cheese to produce wine means that France has comparative (i.e., relative) advantage in wine production.

Who has the comparative advantage in cheese? The U.S., because it sacrifices less wine than France when it produces cheese.

Think of it this way .......
In France, producing 1 unit of cheese is the loss of 2.5 units of wine; whereas, in the U.S., producing 1 unit of cheese is the loss of only 1 unit of wine. Since the U.S. sacrifices less wine to produce cheese means that the U.S. has comparative (i.e., relative) advantage in cheese production.

Why? The country that sacrifices the least (i.e., has the lowest opportunity cost) will have comparative advantage.

3. Who should produce wine? France, because France has comparative advantage in wine production.

4. Who should produce cheese? U.S., because the U.S. has comparative advantage in cheese production.

5. Why? See above explanation.

Absolute & Comparative Advantage

Just remember this:

Absolute advantage --- producing the most (or according to your text ---- making something using fewer resources than other producers require)
Comparative advantage --- having the lowest opportunity cost

Given the following information which shows the output of 2 goods in 2 countries:

France: Wine - 5, Cheese - 2

United States: Wine - 10, Cheese - 10

QUESTIONS:

1. Who has absolute advantage in wine? in cheese? why?

2. Who has the comparative advantage in wine? in cheese? why?

3. Who should produce wine?

4. Who should produce cheese

5. Why?

Answers will appear in the next posting.

Next topic ---- Gains from specialization and trade! Fun!!!

Happy 19th Birthday Christian!

One of my birthday gifts to you is this blog with some basic microeconomics notes.

Your professor will have his own way of approaching this course, but there are certain core concepts in microeconomics that aren't open to interpretation ---- like in mathematics. Think of this blog as another exposition of those concepts that will hopefully provide some examples that might be helpful to you this semester.

What you will find here has been derived from my personal class notes and from other instructors that I was blessed to have studied with and worked with in economics over the years.

Happy 19th Birthday and with much love,
mom

Assumptions in Micro .....

Microeconomic theory studies decision-making based on costs vs. benefits. It's really that simple! Of course, throughout this neoclassical (i.e., microeconomic) theory, you'll study many details, including many graphs, but try not to let that confuse or discourage you --- this course studies costs and benefits (from a few different perspectives) and ultimately, the resulting, rational choices.

So, lets start at the very beginning and make a list of exactly what the core assumptions are:

1. Assume scarcity.
2. Scarcity creates a need for decision-making (i.e., choices).
3. Choices involve opportunity costs (i.e., sacrifices).
4. Assume that people are rational.
5. Consumers act to maximize utility subject to budget constraints.
6. Firms act to maximize profit subject to cost constraints.
7. A free market allows both consumer and producer choices to end up in equilibrium.

..... there are more assumptions to follow, but this is a good start.

Welcome to Microeconomics!

I've always believed that students with good visual skills tend to do well in microeconomics. I assume it's because there are several graphs that one needs to be good at analyzing, and this is what throws a lot of people off. It's not that the graphs are complicated but there *are* several of them, and the skill needed is the ability to visually see and understand the similarities and differences in the models. This course also demands that you understand theories & models from 3 different perspectives ----- mathematically, graphically, and verbally.
It's also the type of course that makes more sense when you get to the end of it, and when you look back over what you've learned. But have patience and remember how well you did in macroeconomics. Microeconomics is not more difficult, it's just different!