Interdependence and the Gains from Trade..

Each person consumes goods and services produced by many other people both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.

COMPARATIVE ADVANTAGE.

There are two ways to compare the ability of two people in producing a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage. In other words the comparison among producers of a good according to their opportunity cost.

ABSOLUTE ADVANTAGE

The comparison among producers of a good according to their productivity.

OPPORTUNITY COST

Whatever must be given up to obtain some item.


COMPARATIVE ADVANTAGE AND TRADE..

Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.

Microeconomics And Macroeconomics...

The field of economics is traditionally divided into two broad subfields. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economywide phenomena, including inflation, unemployment, and economic growth.

DEMAND CURVE

The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.

CALCULATING THE SLOPE OF A LINE. To calculate the slope of the demand curve, we can look at the changes in the x- and y-coordinates as we move from the point Ex. (21 novels, $6) to the point (13 novels, $8). The slope of the line is the ratio of the change in the y-coordinate (-2) to the change in the x-coordinate (+8), which equals -1/4.

The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line. This definition is usually written out in mathematical symbols as follows.

slope = Δy
___
Δx

[first y-coordinate - second y-coordinate = Δy , first x-coordinate - second x-coordinate = Δx]

With a graph like the demand curve, there is no doubt about cause and effect. Because we are varying price and holding all other variables constant, we know that changes in the price cause changes in the quantity someone demands.