Hatfields 8 hours per bushel 10 hours per

Hatfields

8 hours per bushel

10 hours per yard

Mc. Coys

15 hours per bushel

12 hours per yard

To produce corn and cloth, the Hatfields must spend: • 8 hours for 1 bushel of corn • 10 hours for 1 yard of cloth • For a total of 18 production hours for 1 bushel of corn and 1 yard of cloth

To produce corn and cloth, the Mc. Coys must spend: • 15 hours for 1 bushel of corn (compared to 8 for Hatfields) • 12 hours for 1 yard of cloth (compared to 12 for Hatfields) • To a total of 27 hours total production for 1 bushel of corn and 1 yard of cloth

If the Hatfields produce only corn and trade 1 bushel of corn for 1 yard of cloth, they would spend: • 16 hours for 2 bushels of corn (8 x 2) • 16 hours for 1 bushel of corn and 1 yard of cloth

If the Mc. Coys produce only cloth and trade 1 yard of cloth for 1 bushel of corn, they would spend: • 24 hours for 2 yards of cloth (12 x 2) • 24 hours to have 1 yard of cloth and 1 bushel of corn through trade

If the Hatfields and Mc. Coys specialize in the lowest cost production, how much time would each family gain? • Hatfields gain 2 hours (Total production before was 18, now its only 16) • Mc. Coys gain 3 hours (Total production before was 27, now its only 24)

Absolute Advantage The ability of an individual or group to carry out a particular economic activity more efficiently than any other individual or group

Opportunity Cost • The highest-valued alternative that must be sacrificed when an action is selected. • It is what the decision maker could have had instead. • Opportunity cost is not the same thing as money price.

Comparative Advantage • Having the lowest “opportunity cost” of production

Comparative Advantage - Corn • How much does it cost (opportunity cost) a Hatfield to produce 1 bushel of corn? • 4/5 yard of cloth • 1 ¼ yards of cloth • 8 hours of corn production/10 hours of cloth production • 15 hours of corn production/12 hours of cloth production

Comparative Advantage - Cloth • How much does it cost (opportunity cost) a Hatfield to produce 1 yard of cloth? • 1 ¼ bushels of corn • 4/5 bushels of corn • 10 hours of cloth production/8 hours of corn production • 12 hours of cloth production/15 hours of corn production

Trade-off • In achieving certain economic goals, we may have to sacrifice others. • For example, when solving unemployment, we may cause inflation. • When raising taxes to redistribute money to the poor, we may depress the incentive to work • When specializing and trading, the Hatfields and Mc. Coys had to “tradeoff” self-sufficiency and security for leisure time and more material possessions.