1. Unit 1: Basic Economic Concepts

2. Specialization and Trade
Why do people trade? 2

3. Why do people trade?
Assume people didn’t trade. What things would you have to go without?
Everything you don’t produce yourself!
(Clothes, car, cell phone, bananas, heath care, etc)
The Point: Everyone specializes in the production of goods and services and trades it to others
What would life be like if cities couldn’t trade with cities or states couldn’t trade with states?
Limiting trade would reduce people’s choices and make people worse off. 3

4. Why do people trade?
Assume people didn’t trade. What things would you have to go without?
Everything you don’t produce yourself!
(Clothes, car, cell phone, bananas, heath care, etc)
The Point: Everyone specializes in the production of goods and services and trades it to others
What would life be like if cities couldn’t trade with cities or states couldn’t trade with states?
Limiting trade would reduce people’s choices and make people worse off.
The Point: More access to trade means more choices and a higher standard of living. 4

5. Absolute and Comparative Advantage5

6. Per Unit Opportunity Cost 1 hat costs a half of a shirt
Per Unit Opportunity Cost Review
Per Unit Opportunity Cost
= Opportunity Cost
Units Gained
Assume it costs you $50 to produce 5 t-shirts. What is your PER UNIT cost for each shirt?
$10 per shirt
Now, take money out of the equation. Instead of producing 5 shirts you could have made 10 hats.
What is your PER UNIT OPPORTUNITY COST for each shirt in terms of hats given up?
1 shirt costs 2 hats
What is your PER UNIT OPPORTUNITY COST for each hat in terms of shirts given up?
1 hat costs a half of a shirt 6

7. Per Unit Opportunity Cost Review
Ronald McDonald can produce 20 pizzas or 200 burgers Papa John can produce 100 pizzas or 200 burgers
What is Ronald’s opportunity cost for one pizza in terms of burgers given up?
What is Ronald’s opportunity cost for one burger in terms of pizza given up?
What is Papa John’s opportunity cost for one pizza in terms of burgers given up?
What is Papa John’s opportunity cost for one burger in terms of pizza given up?
1 pizza cost 10 burgers
1 burger costs 1/10 pizza
1 pizza costs 2 burgers
1 burger costs 1/2 pizza
Ronald has a COMPARATIVE ADVANTGE in the production of burgers
Papa John has a COMPARATIVE ADVANTAGE in the production of pizza 7

8. Absolute and Comparative Advantage
Absolute Advantage
The producer that can produce the most output OR requires the least amount of inputs (resources)
Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20.
Comparative Advantage
The producer with the lowest opportunity cost.
Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost.
Countries should trade if they have a relatively lower opportunity cost
They should specialize in the good that is “cheaper” for them to produce 8

9. Shows the maximum amount of products a country can produce
Output Question:
Shows the maximum amount
of products a country can produce

10. Wheat Sugar USA 30 30 Brazil 10 20 Sugar (tons) Wheat (tons) 45 40 3525 20 15 10
Wheat (tons)

11. Wheat Sugar USA 30 30 Brazil 10 20 (1W costs 1S) (1S costs 1W)
1. Which country has an absolute advantage in producing sugar?
2. Which country has an absolute advantage in producing wheat?
3. Which country has a comparative advantage in producing sugar?
4. Which country has a comparative advantage in producing wheat?
5. Which country should specialize in sugar production?
6. Which country should specialize in wheat production?

12. International Trade TRADE SHIFTS THE PPC! USA Brazil AFTER TRADE45 40 35 30 25 20 15 10 5
AFTER TRADE 30 25 20 15 10 5
Sugar (tons)
Sugar (tons)
AFTER TRADE
Wheat (tons)
Wheat (tons)

13. Shows the number of resources required to
Input Questions:
Shows the number of resources required to
produce a specific amount of output
Answers:
Neither
Canada
Japan
CDs
Beef

14. Number of workers One Car One Bike USA Brazil4 2
Brazil 5 1
Which country has an absolute advantage in producing cars?
2. Which country has an absolute advantage in producing bikes?
3. Which country has a comparative advantage in producing cars?
4. Which country has a comparative advantage in producing bikes?
5. Which country should specialize in cars production?
6. Which country should specialize in bikes production?
USA
Brazil
USA
Brazil
USA
Brazil

15. Output: Other goes Over
OOO=
Output: Other goes Over
Answers:
Neither
Canada
Japan
CDs
Beef

16. (The variable is resources or time) Input: Other goes Under
Input Questions
(The variable is resources or time)
IOU=
Input: Other goes Under
Answers
Both
U.S. (Input Question)
France
Corn