Production possibility curve and opportunity cost(3) Why does opportunity cost increase? Resources or factors are Not homogeneous Not used in the same fixed proportion in the production of all commodities
Production possibility curve and opportunity cost(3) • Why does opportunity cost increase? • Resources or factors are : • Not homogeneous • Not used in the same fixed proportion in the production of all commodities •
Social indifference curve Represent the various combinations of two commod ities that yield equal satisfaction to the community or nation Marginal rate of substitution(MRS): the absolute value of the slope of a social indifference curve at a point. It represents the amount of one commodity that a nation could give up in exchange for one extra unit of a second commodity and still remain on the same indifference curve ·S| has the same characteristics as‖C: Diminishing MRS; a higher SIC refers to a higher level of satisfaction; any two SIC never cross Some difficulties with sic. There would be no sic because of paradox of voting trade will cause income distribution change and sic change so the sics before and after trade will cross But for the convenient of analysis we assume there are sics and they will not cross
Social indifference curve • Represent the various combinations of two commodities that yield equal satisfaction to the community or nation. • Marginal rate of substitution (MRS): the absolute value of the slope of a social indifference curve at a point. It represents the amount of one commodity that a nation could give up in exchange for one extra unit of a second commodity and still remain on the same indifference curve. • SIC has the same characteristics as IIC: • Diminishing MRS; a higher SIC refers to a higher level of satisfaction; any two SIC never cross. • Some difficulties with SIC: • There would be no SIC because of paradox of voting; trade will cause income distribution change and SIC change, so the SICs before and after trade will cross. • But for the convenient of analysis, we assume there are SICs and they will not cross
Standard model of trade theory (1) Equilibrium in closed economy and the comparative advantage · Three conditions MRT XC=XP, YC=YP(Market Clearing
Standard model of trade theory(1) • Equilibrium in closed economy and the comparative advantage. • Three conditions: Y X P P MRT = Y X P P MRS = XC=XP，YC=YP （Market Clearing）
tgPNPA' a -ga < pi (a)A国的封闭经济均衡 b)B国的封闭经济均衡
Y 0 X Y 0 X (a)A国的封闭经济均衡 (b)B国的封闭经济均衡 A IA PA t g 1 = A PA P = t g PA t g = 1 = PA t g IB A
Standard model of trade theory (2) Equilibrium in open economy P XP-XC=Xc-XP(BC=cE) Yo=r-YP(BC=ce
Standard model of trade theory(2) • Equilibrium in open economy w B B y w x W P P P P P = = = X X X X (BC C E ) B P B C A C A P − = − = Y Y Y Y (B C CE) A P A C B C B P − = − =