1. Microeconomics
Lecture 3
Trade-offs,
Comparative Advantage,
and the Market System

2. Yabut

3. Intent
Result

7. Fell
Pushed
Jumped
Result the same

8. Slope
Percentage Change
Relationships
Cause and Effect
Areas

9. Notation
%
Percent
Change
% Percentage Change

10. % Percentage Change
New - Old
Old

11. % Percentage Change
New - Old
Old
7-5
5

12. % Percentage Change
New - Old
Old
7-5 =
5

13. % Percentage Change
New - Old
Old
7-5 = 2
5 5

14. % Percentage Change
New - Old
Old
7-5 = 2 =
5 5

15. % Percentage Change
New - Old
Old
7 - 5 = 2 = .4
5 5

16. % Percentage Change
New - Old
Old
7 - 5 = 2 = .4 =
5 5

17. % Percentage Change
New - Old
Old
7 - 5 = 2 = .4 = 40%
5 5

18. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old

19. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9-6
6

20. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9-6 =
6

21. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9-6 = 3
6 6

22. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9-6 = 3 =
6 6

23. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9 - 6 = 3 = .5
6 6

24. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9 - 6 = 3 = .5 =
6 6

25. Last year the price was $6.
This year the price is $9.
What is the percentage change?
New - Old
Old
9 - 6 = 3 = .5 = 50%
6 6

35. Y
X

36. Price
Y
X Quantity

37. $
Price
Y
X Quantity Q

38. $
Q

39. $
Q

40. $
Q

41. $
Q

42. $
Q

43. $
Q

44. Opportunity Cost

45. Opportunity Cost
The highest valued
alternative

46. Production Possibilities Frontier
1,000,000
900,000
800,000
700,000
600,000
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

47. 1,000,000
900,000
iPods to iPads 3 to 1
800,000
700,000
600,000 iPads to iPods 1 to 3
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

48. 1,000,000
900,000
800,000
700,000
600,000
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

49. 1,000,000
900,000
iPods: 900,000 iPads: 0
800,000
700,000
600,000
iPods: 600,000 iPads: 100,000
iPods
500,000
400,000
300,000
iPods: 300,000 iPads: 200,000
200,000
100,000
iPods: 0 iPads: 300,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

50. 1,000,000
900,000
800,000
700,000
600,000
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

51. 1,000,000
900,000
800,000
700,000 Bows Out Due to
600,000
Opportunity Costs
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

52. 1,000,000
900,000
800,000
700,000
600,000
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

53. 1,000,000
900,000
800,000
700,000
600,000
iPods
500,000
400,000
300,000
Innovation that only
helps iPad
200,000
production
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

54. 1,000,000
900,000
800,000
Innovation that
helps both.
700,000
600,000
iPods
500,000
400,000
300,000
200,000
100,000
0
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000
iPads

55. Absolute Advantage
Produce more with
the same resources
Comparative Advantage
Produce at a
lower opportunity cost

56. David Ricardo
(1772 - 1823)
Principles of
Political Economy
and Taxation
Comparative Advantage

58. Utopia vs. Reality

59. Utopia vs. Reality
Reality always loses

60. Utopia vs. Reality
Reality always loses
Realistic Alternatives

61. The basis for trade is
comparative advantage,
not
absolute advantage.

63. No Trade
2 Hooks and 2 Fish
10 Hours - 5 Hours per Fish
Total
Gale Ali
Hours
Make a
3 2 5
Hook
Catch
4 1 5
a Fish
Total
7 3 10
Hours

64. With Trade
2 Hooks and 2 Fish
8 Hours - 4 Hours Per Fish
Total
Gale Ali
Hours
Make a 2 hooks
6
Hook 6 hours
Catch 2 fish
2
a Fish 2 hours
Total
6 2 8
Hours

65. Saudi Idaho

66. Saudi Arabia Idaho
Dates Potatoes Dates Potatoes
24 0 6 0
20 1 5 5
16 2 4 10
12 3 3 15
8 4 2 20
4 5 1 25
0 6 0 30
Ratios Ratios
24 to 6 6 to 30
4 Dates for 1 Potato 1/5 Dates for 1 Potato
6 to 24 30 to 6
1/4 Potato for 1 Date 5 Potatoes for 1 Date

67. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15
12
9
6
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

68. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15
12
9
6
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

69. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12
9
6
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

70. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

71. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
Idaho
PPF 1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

72. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
Idaho
PPF 1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

73. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
Idaho
PPF 1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

74. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
Idaho
PPF 1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

75. Dates
Should Idaho and Saudi Trade?
27
Dates Potatoes
24 24 0
20 1
21 16 2
12 3
8 4
18
4 5
0 6
15 Saudi
PPF
12 Dates Potatoes
6 0
5 5
9
4 10
3 15
6
2 20
Idaho
PPF 1 25
3 0 30
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

76. Internal
Dates Potatoes
Price
Idaho 5 Potatoes 1/5 Date
Saudi 1/4 Potato 4 Dates

77. Internal
Dates Potatoes
Price
Idaho 5 Potatoes 1/5 Date
Saudi 1/4 Potato 4 Dates

78. Internal
Dates Potatoes
Price
Idaho 5 Potatoes 1/5 Date
Saudi 1/4 Potato 4 Dates

79. No Trade Dates Potatoes
Idaho 3 15
Saudi 12 3
Total 15 18

80. Specialize Dates Potatoes
Idaho 0 30
Saudi 24 0
Total 24 30

81. Analysis Dates Potatoes
No Trade
15 18
Totals
Specialize
24 30
Totals
Gain +9 +12

82. Trade Dates Potatoes
Idaho 3 to 12 = +9 15
California 12 3 to 15 = +12
Total 24 30

83. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15
12
9
6
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

84. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi
PPF
12
9
6
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

85. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi
PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

86. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi
PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

87. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi
PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

88. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi Trade
PPF PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

89. Dates
Should Idaho and Saudi Trade?
27
24
21
18
15 Saudi Trade
PPF PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

90. Dates
Should Idaho and Saudi Trade?
27
Idaho
24
gains
9 Dates
21
18
15 Saudi Trade
PPF PPF
12
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

91. Dates
Should Idaho and Saudi Trade?
27
Idaho
24
gains
9 Dates
21
18
15 Saudi Trade California
PPF PPF gains
12 12
potatoes
9
6
Idaho
PPF
3
0
0 3 6 9 12 15 18 21 24 27 30 Potatoes

92. Markets
Where Buyers and
Sellers Trade

93. Households
Individuals in a home
Sell Factors of Production
Buy Goods & Services

94. Firms
Buy Factors of Production
Sell Goods & Services

95. Product Markets
Markets for finished
goods and services
- Stores -

96. Factor Markets
Markets for goods and
services used to make
products

98. Households

99. Households
Firms

100. Households
Labor
Capital
Natural
Resources
Entrepreneurs
Firms

101. Households
Labor
Capital
Goods & Natural
Services Resources
Entrepreneurs
Firms

102. Households
Labor
Capital Wages &
Goods & Natural
Spending Payments
Services Resources for Factors
Entrepreneurs
Firms

103. Households
Labor
Capital Wages &
Spending Product Goods &
Services
Natural
Resources
Payments
for Factors
Markets Entrepreneurs
Firms

104. Households
Labor
Capital
Spending Product Goods & Natural Factor Wages &
Payments
Markets
Services Resources
Entrepreneurs
Markets for Factors
Firms

105. The Market System
Trust
Private Property Rights
Rule of Law

106. Why are some
rich and
others poor?