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Market Behavior

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  • Jan. 6, 2013
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Market Behavior
Case Assignment (Module 01)
TUI University

This paper describes the concepts of Comparative and Absolute Advantage. I will demonstrate the basic concepts of module to a classic model in economics by showing the USA and Canada in trade. This will be done by assuming there are only two goods in the economy; wheat and corn. I will also include how trade affects the production possibilities frontier and how other factors can expand the production possibilities frontier.

1.Explain the concepts of Comparative and Absolute Advantage. If there were only 2 goods in the economy: wheat and corn.
USA 4 2
Canada 5 8
Opportunity cost represents the lost value, which is suffered as a result of choosing to produce one amount of a good over a given amount of the other. In this case, we assume that each party’s ability is limited to the production of the listed quantities only. Every time the US will produce 4 units of wheat and 2 units of corn while Canada will produce 5 units of wheat and 8 units of corn. For every 1 unit of wheat the US produces, there is 0.5 unit of corn produced as well by the US. However, for every 1 unit of corn the US produces, there are 2 units of wheat produced as well. For every 1 unit of wheat Canada produces, there are 1.6 units of corn produced by Canada. And for every 1 unit of corn produced by Canada, there is 0.6 unit of wheat produced. According to these figures, the US is more efficient in the production of wheat while Canada is more efficient in the production of corn. Absolute advantage is an economic theory initially developed by Adam Smith in his “Wealth of Nations” book. He established that a party (person, country, company) has an absolute advantage over its competitor(s) if/ when the said party can produce greater outputs by using the same/ equal resources or inputs as its competitor(s). Looking at the given example, Canada produces 5 units...
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