微觀經(jīng)濟學

Autumn,2011介紹WHOAMI?陳斌中山大學管理學院工商管理系Office:S576

Phone:8411-2761Email:助教陸劍寶,杜斌OfficeHours:教材PrinciplesofEconomics,N.GregoryMankiw

考試兩次作業(yè)，一次期中，一次期末注意考試日期2011年11月11日作業(yè)和期中考試只考階段內(nèi)容期末考試將考全部課程內(nèi)容

除極特殊情況以外，缺考者得零分

沒有補考或者緩考成績家庭作業(yè):10％考勤:10％期中考試:20％期末考試:60％

TheTheoryofEconomicsdoesnot

furnishabodyofsettledconclusions

immediatelyapplicabletopolicy.Itis

amethodratherthanadoctrine,an

apparatusofthemind,atechniqueof

thinkingwhichhelpsitspossessorto

drawcorrectconclusions

JohnMaynardKeynesIsEconomicsUseful?ingathinkerChangesthewayyouviewlifeandunderstandproblemsAnallroundmajorMicroeconomicsTheoryApplicationsLaboreconomicsEconomicsofeducationDevelopmenteconomicsAgriculturaleconomicsIndustrialorganizationsHealtheconomics……IntroductionMacroeconomicsversusMicroeconomicsTentativeNatureofEconomicKnowledgeTheAssumptionof“EconomicMan”WhatisEconomics?Studiesinflation,unemployment,businesscycle,economicgrowth,einequalityStudieshowaconsumer’sdecisions,afirm’sdecisions,andalaborer’sdecisions,etc.Economicsisthestudieshoweconomyfunctions—macroeconomicsversusmicroeconomicsMicroeconomicsprovidesfoundationforustounderstandmacroeconomicsNotethetentativenatureofeconomicknowledgeWhatisEconomics?OnOct4,2008,AlanGreenspantriedtoexplaintotheCongresswhathadgonewrongwiththefinancialmarketsoverthepastyear.“Inotherwords,”ahouserepresentativesaid,“youfoundthatyourviewoftheworld,yourideology,wasnotright.Itwasnotworking.”WhatisEconomics?“Precisely,”repliedGreenspan.‘That’spreciselythereasonIwasshocked,becauseIhadbeengoingforfortyyearsormorewithveryconsiderableevidencethatitwasworkingexceptionallywell.”“Thewholeintellectualedificecollapsedinthesummeroflastyear,”headded.Whysofeweconomistshadforewarnedthecrisis?Whatiswrongwitheconomics?Oneview:Nothingwrongwitheconomics–logicallyimpossibletomakesuchpredictionsWhatisEconomics?Anotherview:Overconfidenceinourknowledge,freemarketideology,closetiebetweenacademicandbusinessRobertLucas,themostdistinguishedmacroeconomistalive,saidinhispresidentialaddresstotheAmericanEconomicAssociationinJan2003:“Macroeconomicswasbornasadistinctfieldinthe1940s,asapartoftheintellectualresponsetotheGreatDepression.Thetermthenreferredtothebodyofknowledgeandexpertisethatwehopedwouldpreventtherecurrenceofthateconomicdisaster.WhatisEconomics?“Mythesisinthislectureisthatmacroeconomicsinthisoriginalsensehassucceeded:Itscentralproblemofdepression-preventionhasbeensolved,forallpracticalpurposes,andhasinfactbeensolvedformanydecades.”AccordingtoJudgeRichardPosner,inhisbookFailureofCapitalism,“OnSeptember19,2008,Lucasexpressedskepticismthattheeconomywouldslipintoarecession–whereithadalreadybeenfortenmonths.”WhatisEconomics?R.Posner,“Someofthemediacommentaryhasattributedtheeconomicprofession’sunsatisfactoryperformancetoacademic’sbeingoverlyreliantonabstractmathematicalmodels…“[but]professorsoffinance,whoarefoundmainlyinbusinessschoolsratherthanineconomicdepartments,andwhosefieldoverlapsmacroeconomicsinregardtorecessionanddepressions,tendtobedeeplyinvolvedintherealworldoffinancialmarkets..WhatisEconomics?“Theentwinementoffinanceprofessorswiththefinancialindustryhasadarkside.Iftheycriticizetheindustryandsuggesttighterregulation,theymayeblacksheepandloselucrativeconsultantships.Thisconflictofinterestmayhavecausedsomeeconomiststopulltheirpunches.”(p.259,R.A.Posner,2009)TheAssumptionofEconomicManIneverydaylife,theindividualcaresmoreabouthimself/herselfthanaboutothers.AdamSmith(1723-1790)inhisWealthofNations(1776)used“self-love”todescribethispropensity.TheAssumptionofEconomicMan“Itisnotfromthebenevolenceofthebutcher,thebrewer,orthebakerthatweexpectourdinner,butfromtheirregardtotheirowninterest.”eachparticipantinacompetitivemarketis“l(fā)edbyaninvisiblehandtopromoteanendwhichwasnopartofhisintention.”TheAssumptionofEconomicManInthechapterof“BiographiesofMoneyMakers”(貨殖列傳)ofhisRecordsoftheHistorian,SimaQian(司馬遷)wrotethat:天下熙熙，皆為利來；天下壤壤，皆為利往夫千乘之王，萬家之侯，百室之君，尚猶患貧，而況匹夫編戶之民乎？各勸其業(yè)，樂其事，若水之趨下，日夜無休時。不召而自來，不求而民出之TheAssumptionofEconomicMan

Economicman,orHomoeconomicus—individualsareselfish,narrowlydefined.Inreality,individualsareoftenaltruistic,concernedaboutthewellbeingofothers“IfIamnotformyself,whowillbeforme?IfIamonlyformyself,whatamI?Ifnotnow,when?”(RabbiHillel)IndividualsareconcernedaboutfairnesstooTheAssumptionofEconomicManAlbertRees,anpaniedlaboreconomistatChicago,administratorinthegovernment,provostatPrincetonUniversity,presidentatSloanFoundation.“Theneoclassicaltheoryofwagedetermination,whichItaughtfor30yearsandhavetriedtoexplaininmytextbook…h(huán)asnothingtosayaboutfairness…Beginninginthemid-1970s,IbegantofindmyselfinaseriesofrolesinwhichIhaveparticipatedinsettingorcontrollingwagesandsalaries.TheseincludedsittingonthreewagestabilizationbodiesduringtheNixonandFordadministrations….TheAssumptionof“EconomicMan”“InnoneoftheserolesdidIfindthetheorythatItaughtsolongtobetheslightesthelp.Thefactorsinvolvedinsettingwagesandsalariesintherealworldseemedtobeverydifferentfromthosespecifiedintheneoclassicaltheory.Theonefactorthatseemedtobeofoverwhelmingimportanceinallthesesituationswasfairness.”TheAssumptionofEconomicManAlfredMarshall(1842-1924),fatherofneo-classicaleconomicsWhocoinedthetermeconomics(ratherthanpoliticaleconomy)IntheopeningpagesofthePrinciples,Marshalldismissedtheideathateconomicsshouldmodeltheindividualasaselfishcalculatingmachine.TheAssumptionofEconomicManEvenSmithwrotehisTheTheoryofMoralSentiment(道德情操論),inwhichheemphasizedtheimportanceofempathyinhumansociety.Fairnessisrarelymentionedintoday’secontextbook.Itsappearance,ifany,onlyservestoshowthatthebookiscomprehensive.Whybotherstoclarifythis?TheAssumptionofEconomicManWrongpolicyprescription:Haifa’sdaycarecentersAfinewasimposedonparentswhowerelatepickinguptheirchildrenParentsrespondedtothefinebydoublingthefractionoftimetheyarrivelate.Whenafter12weeksthefinewasrevoked,theirenhancedtardinesspersistedunabated.Thefineseemstohaveunderminedtheparents’senseofethicalobligationtoavoidinconveniencingtheteachersandledthemtothinkoflatenessasjustanothercommoditytheycouldpurchase.TheAssumptionofEconomicManItmayturngoodpeopleintobadpeople.Economicstudentstendtobemoreselfish.(Italsofailstoattracttoeconomicspeoplewithstrongethnicalfeelings)“Whilemymomandkindergartenteacherstaughtmemoral,mygraduateeconomicstriedtoun-teachme”ButrememberwhatMarshalldefinedoneofthechieftasksofeconomicsthisway1TenPrinciplesofEconomicsEconomy... ...ThewordeconomycomesfromaGreekwordfor“onewhomanagesahousehold.”TENPRINCIPLESOFECONOMICSAhouseholdandaneconomy

facemanydecisions:Whowillwork?Whatgoodsandhowmanyofthemshouldbeproduced?Whatresourcesshouldbeusedinproduction?Atwhatpriceshouldthegoodsbesold?TENPRINCIPLESOFECONOMICSSocietyandScarceResources:Themanagementofsociety’sresourcesisimportantbecauseresourcesarescarce.Scarcity...meansthatsocietyhaslimitedresourcesandthereforecannotproduceallthegoodsandservicespeoplewishtohave.TENPRINCIPLESOFECONOMICSEconomicsisthestudyofhowsocietymanagesitsscarceresources.TENPRINCIPLESOFECONOMICSHowpeoplemakedecisions.Peoplefacetradeoffs.Thecostofsomethingiswhatyougiveuptogetit.Rationalpeoplethinkatthemargin.Peoplerespondtoincentives.TENPRINCIPLESOFECONOMICSHowpeopleinteractwitheachother.Tradecanmakeeveryonebetteroff.Marketsareusuallyagoodwaytoorganizeeconomicactivity.Governmentscansometimesimproveeconomices.TENPRINCIPLESOFECONOMICSTheforcesandtrendsthataffecthowtheeconomyasawholeworks.Thestandardoflivingdependsonacountry’sproduction.Pricesrisewhenthegovernmentprintstoomuchmoney.Societyfacesashort-runtradeoffbetweeninflationandunemployment.Principle#1:PeopleFaceTradeoffs.“Thereisnosuchthingasafreelunch!”Makingdecisionsrequirestrading

offonegoalagainstanother.Principle#1:PeopleFaceTradeoffs.Togetonething,weusuallyhavetogiveupanotherthing.Gunsv.butterFoodv.clothingLeisuretimev.workEfficiencyv.equityPrinciple#1:PeopleFaceTradeoffsEfficiencyv.EquityEfficiencymeanssocietygetsthemostthatitcanfromitsscarceresources.Equitymeansthebenefitsofthoseresourcesaredistributedfairlyamongthemembersofsociety.Principle#2:TheCostofSomethingIsWhatYouGiveUptoGetIt.Decisionsrequirecomparingcostsandbenefitsofalternatives.Whethertogotocollegeortowork?Whethertostudyorgooutonadate?Whethertogotoclassorsleepin?Theopportunitycostofanitemiswhatyougiveuptoobtainthatitem.Principle#2:TheCostofSomethingIsWhatYouGiveUptoGetIt.LALakerbasketballstarKobeBryantchosetoskipcollegeandgostraightfromhighschooltotheproswherehehasearnedmillionsofdollars.Peoplemakedecisionsbycomparingcostsandbenefitsatthemargin.Principle#3:RationalPeopleThinkattheMargin.Marginalchangesaresmall,incrementaladjustmentstoanexistingplanofaction.Principle#4:PeopleRespondtoIncentives.Marginalchangesincostsorbenefitsmotivatepeopletorespond.Thedecisiontochooseonealternativeoveranotheroccurswhenthatalternative’smarginalbenefitsexceeditsmarginalcosts!Principle#5:TradeCanMakeEveryoneBetterOff.Peoplegainfromtheirabilitytotradewithoneanother.Competitionresultsingainsfromtrading.Tradeallowspeopletospecializeinwhattheydobest.Principle#6:MarketsAreUsuallyaGoodWaytoOrganizeEconomicActivity.Amarketeconomyisaneconomythatallocatesresourcesthroughthedecentralizeddecisionsofmanyfirmsandhouseholdsastheyinteractinmarketsforgoodsandservices.Householdsdecidewhattobuyandwhotoworkfor.Firmsdecidewhotohireandwhattoproduce.Principle#6:MarketsAreUsuallyaGoodWaytoOrganizeEconomicActivity.AdamSmithmadetheobservationthathouseholdsandfirmsinteractinginmarketsactasifguidedbyan“invisiblehand.”Becausehouseholdsandfirmslookatpriceswhendecidingwhattobuyandsell,theyunknowinglytakeintoaccountthesocialcostsoftheiractions.Asaresult,pricesguidedecisionmakerstoreachesthattendtomaximizethewelfareofsocietyasawhole.Principle#7:GovernmentsCanSometimesImproveMarketes.Marketfailureoccurswhenthemarketfailstoallocateresourcesefficiently.Whenthemarketfails(breaksdown)governmentcanintervenetopromoteefficiencyandequity.Principle#7:GovernmentsCanSometimesImproveMarketes.Marketfailuremaybecausedbyanexternality,whichistheimpactofonepersonorfirm’sactionsonthewell-beingofabystander.marketpower,whichistheabilityofasinglepersonorfirmtoundulyinfluencemarketprices.Principle#8:TheStandardofLivingDependsonaCountry’sProduction.Standardoflivingmaybemeasuredindifferentways:Bycomparingpersonales.Bycomparingthetotalmarketvalueofanation’sproduction.Principle#8:TheStandardofLivingDependsonaCountry’sProduction.Almostallvariationsinlivingstandardsareexplainedbydifferencesincountries’productivities.Productivityistheamountofgoodsandservicesproducedfromeachhourofaworker’stime.Principle#8:TheStandardofLivingDependsonaCountry’sProduction.Standardoflivingmaybemeasuredindifferentways:Bycomparingpersonales.Bycomparingthetotalmarketvalueofanation’sproduction.Principle#9:PricesRiseWhentheGovernmentPrintsTooMuchMoney.Inflationisanincreaseintheoveralllevelofpricesintheeconomy.Onecauseofinflationisthegrowthinthequantityofmoney.Whenthegovernmentcreateslargequantitiesofmoney,thevalueofthemoneyfalls.Principle#10:SocietyFacesaShort-runTradeoffBetweenInflationandUnemployment.ThePhillipsCurveillustratesthetradeoffbetweeninflationandunemployment:òInflatione

?Unemployment It’sashort-runtradeoff!SummaryWhenindividualsmakedecisions,theyfacetradeoffsamongalternativegoals.Thecostofanyactionismeasuredintermsofforegoneopportunities.Rationalpeoplemakedecisionsbycomparingmarginalcostsandmarginalbenefits.Peoplechangetheirbehaviorinresponsetotheincentivestheyface.SummaryTradecanbemutuallybeneficial.Marketsareusuallyagoodwayofcoordinatingtradeamongpeople.Governmentcanpotentiallyimprovemarketesifthereissomemarketfailureorifthemarketeisinequitable.SummaryProductivityistheultimatesourceoflivingstandards.Moneygrowthistheultimatesourceofinflation.Societyfacesashort-runtradeoffbetweeninflationandunemployment.2ThinkingLikeanEconomistThinkingLikeanEconomistEveryfieldofstudyhasitsownterminologyMathematicsintegrals

axioms

vectorspacesPsychologyego

id

cognitivedissonanceLawpromissory

estoppel

torts

venuesEconomicssupply

opportunitycost

elasticity

consumersurplus

demand

comparativeadvantage

deadweightlossThinkingLikeanEconomistEconomicstrainsyouto....Thinkintermsofalternatives.Evaluatethecostofindividualandsocialchoices.Examineandunderstandhowcertaineventsandissuesarerelated.THEECONOMISTASASCIENTISTTheeconomicwayofthinking...Involvesthinkinganalyticallyandobjectively.Makesuseofthescientificmethod.TheScientificMethod:Observation,Theory,andMoreObservationUsesabstractmodelstohelpexplainhowacomplex,realworldoperates.

Developstheories,collects,andanalyzesdatatoevaluatethetheories.TheRoleofAssumptionsEconomistsmakeassumptionsinordertomaketheworldeasiertounderstand.Theartinscientificthinkingisdecidingwhichassumptionstomake.Economistsusedifferentassumptionstoanswerdifferentquestions.EconomicModelsEconomistsusemodelstosimplifyrealityinordertoimproveourunderstandingoftheworldTwoofthemostbasiceconomicmodelsinclude:TheCircularFlowDiagramTheProductionPossibilitiesFrontierOurFirstModel:TheCircular-FlowDiagramThecircular-flowdiagramisavisualmodeloftheeconomythatshowshowdollarsflowthroughmarketsamonghouseholdsandfirms.Figure1TheCircularFlowCopyright?2004South-WesternSpendingGoodsandservicesboughtRevenueGoodsandservicessoldLabor,land,andcapitale

=Flowofinputs

andoutputs

=FlowofdollarsFactorsofproductionWages,rent,andprofit

FIRMSProduceandsellgoodsandservicesHireandusefactorsofproduction

BuyandconsumegoodsandservicesOwnandsellfactorsofproductionHOUSEHOLDS

HouseholdssellFirmsbuyMARKETSFORFACTORSOFPRODUCTION

FirmssellHouseholdsbuyMARKETSFORGOODSANDSERVICESOurFirstModel:TheCircular-FlowDiagramFirmsProduceandsellgoodsandservicesHireandusefactorsofproductionHouseholdsBuyandconsumegoodsandservicesOwnandsellfactorsofproductionOurFirstModel:TheCircular-FlowDiagramMarketsforGoodsandServicesFirmssellHouseholdsbuyMarketsforFactorsofProductionHouseholdssellFirmsbuyOurFirstModel:TheCircular-FlowDiagramFactorsofProductionInputsusedtoproducegoodsandservicesLand,labor,andcapitalOurSecondModel:TheProductionPossibilitiesFrontierTheproductionpossibilitiesfrontierisagraphthatshowsthecombinationsofoutputthattheeconomycanpossiblyproducegiventheavailablefactorsofproductionandtheavailableproductiontechnology.Figure2TheProductionPossibilitiesFrontierCopyright?2003Southwestern/ThomsonLearningProductionpossibilitiesfrontierABCQuantityofCarsProduced2,2006001,00030007002,0003,0001,000QuantityofComputersProducedDOurSecondModel:TheProductionPossibilitiesFrontierConceptsIllustratedbytheProductionPossibilitiesFrontierEfficiencyTradeoffsOpportunityCostEconomicGrowthFigure3AShiftintheProductionPossibilitiesFrontierCopyright?2004South-WesternEQuantityofCarsProduced2,0007002,10075004,0003,0001,000QuantityofComputersProducedAMicroeconomicsandMacroeconomicsMicroeconomicsfocusesontheindividualpartsoftheeconomy.HowhouseholdsandfirmsmakedecisionsandhowtheyinteractinspecificmarketsMacroeconomicslooksattheeconomyasawhole.Economy-widephenomena,includinginflation,unemployment,andeconomicgrowth THEECONOMISTASPOLICYADVISORWheneconomistsaretryingtoexplaintheworld,theyarescientists.Wheneconomistsaretryingtochangetheworld,theyarepolicyadvisor.POSITIVEVERSUSNORMATIVEANALYSISPositivestatementsarestatementsthatattempttodescribetheworldasitis. CalleddescriptiveanalysisNormativestatementsarestatementsabouthowtheworldshouldbe.CalledprescriptiveanalysisPositiveorNormativeStatements?Anincreaseintheminimumwagewillcauseadecreaseinemploymentamongtheleast-skilled.POSITIVEHigherfederalbudgetdeficitswillcauseinterestratestoincrease.POSITIVEPOSITIVEVERSUSNORMATIVEANALYSISPositiveorNormativeStatements?Theegainsfromahigherminimumwageareworthmorethananyslightreductionsinemployment.NORMATIVEStategovernmentsshouldbeallowedtocollectfromtobaccocompaniesthecostsoftreatingsmoking-relatedillnessesamongthepoor.NORMATIVEPOSITIVEVERSUSNORMATIVEANALYSISEconomistsinWashington...serveasadvisersinthepolicymakingprocessofthethreebranchesofgovernment:LegislativeExecutiveJudicialEconomists

inWashingtonSomegovernmentagenciesthatcollecteconomicdataandmakeeconomicpolicy:DepartmentofCommerce

BureauofLaborStatistics

CongressionalBudgetOffice

FederalReserveBoard

WHYECONOMISTSDISAGREETheymaydisagreeaboutthevalidityofalternativepositivetheoriesabouthowtheworldworks.

Theymayhavedifferentvaluesand,therefore,differentnormativeviewsaboutwhatpolicyshouldtrytoplish.Table2TenPropositionsaboutWhichMostEconomistsAgreeCopyright?2004South-WesternSummaryEconomiststrytoaddresstheirsubjectswithascientist’sobjectivity.Theymakeappropriateassumptionsandbuildsimplifiedmodelsinordertounderstandtheworldaroundthem.Twosimpleeconomicmodelsarethecircular-flowdiagramandtheproductionpossibilitiesfrontier.SummaryEconomicsisdividedintotwosubfields:Microeconomistsstudydecisionmakingbyhouseholdsandfirmsinthemarketplace.MacroeconomistsstudytheforcesandtrendsthataffecttheeconomyasawholeSummaryApositivestatementisanassertionabouthowtheworldis.Anormativestatementisanassertionabouthowtheworldoughttobe.Wheneconomistsmakenormativestatements,theyareactingmoreaspolicyadvisorsthanscientists.SummaryEconomistswhoadvisepolicymakersofferconflictingadviceeitherbecauseofdifferencesinscientificjudgmentsorbecauseofdifferencesinvalues.Atothertimes,economistsareunitedintheadvicetheyoffer,butpolicymakersmaychoosetoignoreit.3InterdependenceandtheGainsfromTradeConsideryourtypicalday:YouwakeuptoanalarmclockmadeinKorea.YoupouryourselforangejuicemadefromFloridaorangesandcoffeefrombeansgrowninBrazil.YouputonsomeclothesmadeofcottongrowninGeorgiaandsewninfactoriesinThailand.YouwatchthemorningnewsbroadcastfromNewYorkonyourTVmadeinJapan.Youdrivetoclassinacarmadeofpartsmanufacturedinahalf-dozendifferentcountries....andyouhaven’tbeenupformorethantwohoursyet!InterdependenceandtheGainsfromTradeRemember,economicsisthestudyofhowsocietiesproduceanddistributegoodsinanattempttosatisfythewantsandneedsofitsmembers.InterdependenceandtheGainsfromTradeHowdowesatisfyourwantsandneedsinaglobaleconomy?Wecanbeeconomicallyself-sufficient.Wecanspecializeandtrade

withothers,leadingto

economicinterdependence.InterdependenceandtheGainsfromTradeIndividualsandnationsrelyonspecializedproductionandexchangeasawaytoaddressproblemscausedbyscarcity.Butthisgivesrisetotwoquestions:Whyisinterdependencethenorm?Whatdeterminesproductionandtrade?InterdependenceandtheGainsfromTradeWhyisinterdependencethenorm?Interdependenceoccursbecausepeoplearebetteroffwhentheyspecializeandtradewithothers.Whatdeterminesthepatternofproductionandtrade?Patternsofproductionandtradearebasedupondifferencesinopportunitycosts.APARABLEFORTHEMODERNECONOMYImagine...onlytwogoods:potatoesandmeatonlytwopeople:apotatofarmerandacattlerancherWhatshouldeachproduce?Whyshouldtheytrade?Table1TheProductionOpportunitiesoftheFarmerandRancherCopyright?2004South-WesternProductionPossibilitiesSelf-SufficiencyByignoringeachother:Eachconsumeswhattheyeachproduce.Theproductionpossibilitiesfrontierisalsotheconsumptionpossibilitiesfrontier.Withouttrade,economicgainsarediminished.Figure1TheProductionPossibilitiesCurvePotatoes(ounces)416832A0Meat(ounces)(a)TheFarmer’sProductionPossibilitiesFrontierIfthereisnotrade,thefarmerchoosesthisproductionandconsumption.Copyright?2003Southwestern/ThomsonLearningFigure1TheProductionPossibilitiesCurveCopyright?2003Southwestern/ThomsonLearningPotatoes(ounces)1224B0Meat(ounces)(b)TheRancher’sProductionPossibilitiesFrontier4824Ifthereisnotrade,therancherchoosesthisproductionandconsumption.Thefarmershouldproducepotatoes.Theranchershouldproducemeat.SpecializationandTradeTheFarmerandtheRancherSpecializeandTradeEachwouldbebetteroffiftheyspecializedinproducingtheproducttheyaremoresuitedtoproduce,andthentradewitheachother.Table2TheGainsfromTrade:ASummaryCopyright?2004South-WesternFigure2HowTradeExpandstheSetofConsumptionOpportunitiesCopyright?2003Southwestern/ThomsonLearningPotatoes(ounces)416517832AA*0Meat(ounces)(a)TheFarmer’sProductionandConsumptionFarmer'sproductionandconsumptionwithouttradeFarmer'sconsumptionwithtradeFarmer'sproductionwithtradeFigure2HowTradeExpandstheSetofConsumptionOpportunitiesCopyright?2004South-WesternPotatoes(ounces)12241327B0Meat(ounces)(b)TheRancher’sProductionandConsumption48241218B*Rancher'sconsumptionwithtradeRancher'sproductionwithtradeRancher'sproductionandconsumptionwithouttradeTable2TheGainsfromTrade:ASummaryCopyright?2004South-WesternWhocanproducepotatoesatalowercost--thefarmerortherancher?THEPRINCIPLEOFCOMPARATIVEADVANTAGEDifferencesinthecostsofproductiondeterminethefollowing:Whoshouldproducewhat?Howmuchshouldbetradedforeachproduct?THEPRINCIPLEOFCOMPARATIVEADVANTAGEDifferencesinCostsofProductionTwowaystomeasuredifferencesincostsofproduction:Thenumberofhoursrequiredtoproduceaunitofoutput(forexample,onepoundofpotatoes).Theopportunitycostofsacrificingonegoodforanother.AbsoluteAdvantageThecomparisonamongproducersofagoodaccordingtotheirproductivity—absoluteadvantageDescribestheproductivityofoneperson,firm,ornationcomparedtothatofanother.Theproducerthatrequiresasmallerquantityofinputstoproduceagoodissaidtohaveanabsoluteadvantageinproducingthatgood.TheRancherhasanabsoluteadvantageintheproductionofbothmeatandpotatoes.AbsoluteAdvantageTheRancherneedsonly10minutestoproduceanounceofpotatoes,whereastheFarmerneeds15minutes.TheRancherneedsonly20minutestoproduceanounceofmeat,whereastheFarmerneeds60minutes.OpportunityCostandComparativeAdvantageComparesproducersofagoodaccordingtotheiropportunitycost.WhatevermustbegivenuptoobtainsomeitemTheproducerwhohasthesmalleropportunitycostofproducingagoodissaidtohaveacomparativeadvantageinproducingthatgood.ComparativeAdvantage