Class Twenty One

Trade is a difficult thing. When we trade goods and services within a market, we are just changing stuff. How can wealth come from that?

*Aristotle says a trade is just only when people have equal value on it.

Exchange only happens when value are different

People cooperate to get what they want

What’s the sole purpose of production? Consumption

What’s the sole purpose of trade? Consumption

Eg. Baseball Card Exchange

Me            Friend

$200cash for $0.02cards

759 cards------$1000

760 cards------$8000

What happens to the society?

	Before	After
Me	$200cash+$1000	$8000
Friend	$0.02	$200
Total	$1200.02	$8200

Trade creates wealth by taking stuff from people who value it less to people who value them more.

Eg. Hours to complete yard work

	Mike	Rich
Weeding	80min	120min
Mowing	40min	120min

Rich proposes to weed 3/4 of my driveway if I mowed his lawn.

	Mike	Rich
Weeding	20min	210min
Mowing	80min	0min

For society, 6 hours’ work is now finished in 5hours and 10min with the SAME outcome

Where does that wealth come from?

*Production Possibility Frontier (PPF)

1)       All points on/in the frontier are feasible

2)       All points outside are not feasible

3)       Absolute advantage

4)       All points on the PPF are “productively” efficient (at the lowest cost). (to be economically efficient, you need to be on the proper POSITION on the frontier)

5)       Slope is the opportunity cost (trade-off between goods)

6)       Law of Diminishing Returns (increasing marginal cost and decreasing marginal profit)
7)     Economic growth comes from 3 things
                -Resources increase
                -Discovery of better technology (use stuff more efficiently)
                -Trade
If an increase in x-intersect or y-intersect, then:
i. Additional resources 
ii. Improved technology
iii. Specialization and trade with others