Ch. 6 Gains from Trade

opportunity cost of a task

= hours this task takes/hours required to produce alternative output

A manager of an advertising company just received a new project to create a website and produce a video presentation. She must assign these tasks to her team. Alexis can write the content in four hours and edit a video presentation in three hours. Hoshi can do the content writing in three hours and the video editing in two hours. What are the opportunity costs for Alexis and Hoshi to write content?

Alexis: 4/3; Hoshi: 3/2

How can you use economic concepts to explain why people with leadership skills work as managers, number-crunchers work as business analysts, and people-persons work in sales?

Each of them specializes in the specific tasks for which they hold a comparative advantage.

If your school decided to use an internal market by allowing all students to buy and sell spots in popular classes, who would get a seat in those classes?

Each spot would be allocated to the student who values it most.

Whitney and Houston want to find out who has a comparative advantage in washing the car. Whitney spends three hours washing the car and three hours cleaning the house. Houston spends one hour washing the car and three hours cleaning the house. Who has the comparative advantage in washing the car and what is the opportunity cost?

Houston; 1/3

At home, you decide who should clean the house or shop for groceries. At work, you, as a manager, decide who should run a new advertising campaign, or who should analyze the market trend. What is the underlying question that is similar to both scenarios?

How best can I allocate these tasks?

Which of these BEST explains what markets do?

Markets reallocate stuff to its best uses, which makes people better off.

When a company like Google, which allows its workers to widely distribute information, sets up its own prediction market, what is the outcome?

The internal prediction markets used yield better, more accurate forecasts.

How do Chinese tea farmers learn about a rise in the popularity of tea in the West?

They communicate with buyers through price.

Which role do both market economies and internal markets have in common?

They efficiently allocate scarce resources to the best uses.

The high marginal cost of producing more quinoa leads to _____ because it is difficult for farmers to expand the farmland.

a high price of quinoa

Prediction markets yield useful forecasts because they:

aggregate information from price.

Internal markets efficiently allocate resources by:

allowing people to buy and sell scarce resources within a company.

When NASA sent a spacecraft to Saturn, it set up an internal market by:

allowing the scientists to trade the resources they needed.

As two housemates divide chores between them, they have to decide who should sweep the floor and who should mow the lawn. In this case, the opportunity cost of sweeping the floor is the _____.

amount of lawn that could have otherwise been mowed

Which of these provides an example of the knowledge problem?

an executive of Feeding America that cannot make a decision about which food bank locations are in need of cheese

Some people argue that international trade has no benefit and causes damage to domestic markets. The critics overlook the fact that comparative advantages drive international trade, and that international trade makes people better off because they can get stuff:

at the lowest opportunity cost.

Many buyers use futures contracts to agree to purchase a commodity at a specific time in the future. A futures contract will allow:

businesses to obtain useful information about possible future disruptions to input costs.

Roomba, a $300 robot that vacuums your house for you, is an example of _____. These robots can vacuum your home at a _____ opportunity cost than you can.

comparative advantage; lower

specialization

focusing on specific tasks

After Christmas, you and your friend talked about the gifts that you received. Your friend happens to have the stuff you love and you also have stuff he pines for. So, both of you trade stuff and feel better off for getting something each of you prefers to have. What do we call the benefits that you get from reallocating stuff to better uses?

gains from trade

The reason for international trade is the:

gains from trade created by comparative advantages.

Reallocation generates _____ because we reallocate tasks to the _____ producer.

gains from trade; lowest cost

In the past, discrimination kept women's wages down. Each hour of housework came with a _____ opportunity cost for women than for men, because it meant forgoing an hour of _____.

lower; low-paid work

The lesson from the Korean peninsula seems to be that if you're going to choose the economic system of a country, operating like South Korea under a(n)_____ will yield higher annual incomes and gains from trade than operating like North Korea under a(n) _____.

market economy; centrally planned economy

The history of the Korean peninsula suggests that it is far better to use _____ to _____, as in South Korea, than to follow the economic model of North Korea.

market forces; allocate scarce resources

Both North Korea and South Korea were equally poor in the immediate aftermath of the Korean War. Nowadays, the average annual income in market-oriented South Korea is greater than that in the centrally planned North Korea because _____ lead to _____, which make people better off.

market forces; gains from trade

prediction market

markets whose payoffs are linked to whether an uncertain event occurs

internal markets

markets within a company to buy and sell scarce resources

When Ford set up a prediction market and allowed its employees to bet on the outcome, their forecasts were _____ accurate.

more

If you use comparative advantage to assign tasks, you can produce _____. Each task should be assigned to the person with the _____ opportunity cost.

more; lowest

Dentists use comparative advantage to assign workers to tasks. They allocate the task of cleaning to a hygienist because the:

opportunity cost for dentists to clean teeth is higher than that for hygienists.

You have a baseball bat that you do not want anymore and your friend has a basketball that you want. If you buy the basketball from your friend and your friend buys the baseball bat from you, you both end up with gains from trade. You have:

reallocated the goods to better uses.

Nobel laureate Milton Friedman noted that every single part of the pencil is produced by folks who are:

specializing in the narrow task for which they hold a comparative advantage.

comparative advantage

the ability to do a task at a lower opportunity cost

absolute advantage

the ability to do a task using fewer inputs

What are the gains from trade?

the benefits that come from reallocating resources, goods, and services to better uses

gains from trade

the benefits that come from reallocating resources, goods, and services to better uses

When each food bank knows its marginal benefits, but no one has access to the overall information of every food bank, this causes a problem for managers at headquarters because:

the managers cannot identify the best use for a truckload of food.

When you are managing a household, you must determine who is going to complete certain tasks. If you are using comparative advantage to determine who is going to do which task, you should ask the question:

what is the best way to allocate tasks that need to be done in the household?

knowledge problem

when knowledge needed to make a good decision is not available to the decision maker

When each person in a group—a household, a business, an organization, or the economy—focuses on the task for which they have a comparative advantage, the result is that the group:

will produce more.