Econ 201 Homework # 2

1) Explain why trade allows for greater benefits from economies of scale and economies of knowledge. A drawing may help your explanation.

a. Trade increases the size and extent of the market. It connects all of us as producers to more potential customers. The more we trade, the greater quantity that anyone can potentially sell and will in turn need to produce. The more any firm or person produces, the more they benefit from economies of scale. The more people trade, the more specialized they can become. Greater specialization allows us to focus are limited capacity for knowledge. The more specialized the knowledge that each of us holds, the less overlap between persons, the greater the total knowledge held by human minds. The more society knows, the more efficiently it can produce.

2) Demonstrate the costs of protectionism using a drawing of domestic supply, domestic demand, and world supply. You may assume that the world supply is perfectly elastic. Contrast wasted resources versus deadweight losses. Explain why resources are being wasted under protectionism.

b. Resources are being wasted domestic suppliers require more resources to produce the output than international producers. The opportunity cost of domestic production is higher.

3) Define comparative advantage and absolute advantage. Which matters when two parties are trading? Why?

c. Comparative advantage is what any anyone does best, regardless of how well other people do it. If an individual or population has an absolute advantage, it means they produce everything cheaper/better than others. Only comparative advantage matters when trading because greater wealth is created by focusing on what each party does best.

4) Explain why two people can always benefit from trading with each other?

d. Specialization, economies of scale/knowledge, comparative advantage.

5) Explain why two countries will always benefit from trading with each other?

e....