| Delhi University Series = CBCS B.Com [Hons] Generic Elective INTRODUCTORY MICROECONOMICS Common for Regular & SOL 7 Semester 1 PAST YEARS Examination Papers (Solved) Shiv Das & Sons Educational PublishersSyllabus UNI Unir2, Unir3 Unt 4 Unis Unt 6 ExP.onin THE Susjecr Marrer Or Economics ‘Surrty AND DEMAND: How Manxers Work, MARKETS AND WELFARE ‘Tue Housenous ‘Tue Fin AND PerFecr ‘MARKET STRUCTURE Irerrect MARKET STURCTURE INPUT Markers University Question Papers with Answers w iy o m2 Pa onwards SYLLABUS Semester-1 Generic Elective in Economics I: INTRODUCTORY MICROECONOMICS. ‘Course Objective: This course is designed to expose the students tthe basi principles of microeconomic theory. The emphasis will be on thinking, ike an ‘conomist and the course will illustrate how miro economic concepts can be ‘applied to analyse real-life situations, Course Learning Outcomes. The course introduces the students to the fest course in Economies from the perspective of individual decision making. a5 consumers and producers. The students lear some basic principles of microeconomics, interactions of supply and demand and chafacterstice of perfect and imperfect markets ‘COURSE OUTLINE UNITE: Introduction. Wha is microeconomics? Scope and method of economics; {he economic problem: scarcity and choice: the cancept of opportunity coat the question of what to produce, how to produce and how to distribute output; science of economics; institutions for allocating resources; the basic competitive model; prices, property right and profits Incentives and information; rationing positive versus normative analysis. ‘The Scientific method; the role of assumptions; models and mathematics, why economists sometimes disagree. Interdependence and gains fom trade; specialisation and trade; absolute advantage; comparative advantage and trade. UNIT Supply and demand. Markets and welfare Markets and competition: determinants of individual demand/supply; demand/supply schedule and demand/supply curve; market versus individual demand/supply: shifts in the demand/supply curve demand and supply together, bow prices allocate resources elasticity and its application; controls on pies: taxes and the costs of taxation; consumer surplus; producer serplus and the efficency of the markets. Application to intemational trade: comparison of equilibria with and without trade, the winer and losers from trad; effets of tariffs and quotas; benefits of international trade; some arguments for restricting trade. @nat wei ap Cac aca me consumption decision budget constraint, con The cone pen demand forall other goods tnd 5 palrences(epeesenting Preferences wth ‘ae of diffrence curves; consumer's wit suettution effects; Tabour supply and seer come a sbaon fects kn Eig decon choice Between Ie UNIT Iv “Phe Fem and Perfect Market Str Te Fen ten pce Soy ote en o oa Information Technology Act 2000, Imperfect Market Structure Be tert Tee acy genet poles tow Cope imperfect competion. ure, Behaviour of profit maxnssng ‘and output decisions « Exploring the Subject Matter of Economics Wy should we dy Economies? Sid Hatt ested of rw individuals and societies choose fo se the scatt Ricans tat nature oe! rovons generators have provided. The Key ‘Nord n ts deiiton choose. “Tere ae Yor ma eaone fo study economles: learns way a tanking 1 dean soca, 1 unterstan globe fat, and Sobran inte cz ‘The moat important rewon for stig ekonomi is to learn a way of shring” Neu all decane iwi ae A Hay concept tht reas Srey the decston making pros ete notion of oppor cost. The fll "Rowe makings specie ce includes wha we poe ap by not making the aerate che The besarte tnt ne feego or ge wp, when we ake 2! ova dso sale he opportrty conto at dccon- Aner ‘ess fr sndying economist snbetand socety tte Past and present ‘Covomlc decsone have an cameo iflence on the character of etn 8 Sec. The curent ste ofthe physcal environment, the level of material wel icing andthe nature and numberof jobs areal products of the economic sya Another reson why Economics atued st understand global afar itteradonal evens ofen have mereibe economic impoc For example he ‘cond. world 'war wes a cast naling the US = lotelsconomac ‘Superpower Eurpean counties fot thelr wantactring capac die tthe ‘fen fm Pong Rowley of Eon staal fa eg an 1 2008, most ofthe world suffered from a major recession with diniished conomic owt and high nexployment Milos of people around the weld ist ew fon Coverents rom Chu tothe Und argon to the Ute Sines all struggle four out pce t0 help their onomies recover Understanding eat happen ts cssion ae what Ue government ca aed ‘mo do hep in th covery rane prt of began informed cen, {2.2 Compare the Command seonomy and Latsses Fae Economy tstens: ‘hs Ina pure command economy, he bss economic questions ae erowere ‘bythe cent goverment Though a combination of government owen of :oe ey na pie, pre, ey aa re a ey ae Ths tem Laser ule WSS lak of govemsment involvement in the {them to do, 2 Soom, dividuals and ims pursue thir own sl ‘nom. nthe Pca deeton or regulon; the sum total of millons of Iniest wihon 9 cm os ‘basic economic outcomes. The individual decors iat er ae system answers the base Seen uh a = eee ey Se yn me eee ea Soe eee Sr ced ance ye «dS ences TEP Viiv uswerto see» noi aes not ony ket ut ls ime The wring wea aeesmemia etiam Se et ts Crete im ouatertounemn pyran Stati acntegciten eta a tenn “eins manent omit pet ee ttle te ern ee cre sectemmeny ot cegronran nae eee presen geen ea one Senate ya Soe eee ees Sigiecerseatcanne aoe oti ae eo 4. What do we mean by opportunity sets? Give one example. Rese a rm a ne choices and define the opportunity set. In most economic situations, he ‘Gains Ut i pes choies i, tho constants tht ecto ‘Bevan are and money, Opportaniy sets whose constants are imposed by money are refered to as budget constraints opportuity sets WhO ate Prescribed by time are called time constraints. The budget Spates ae oem me ihe hs decide to spend 7120.0 ether potatoes or rice. A kg of potatoes ats 10 aby of ice 229. So am can Buy 12 ig of potatos or 6 kof ce 8 ‘potions and hg 4pontas and eh ero memes he number of poses purchase, and tong the herzotal ns Locos geen tte ene ‘niet, ss ouput a ‘esa fm he UNIT 1: EXPLORING THE SUBJECT MATTER OF BCONOMICS #3 “The exten cates, in which Ram buys nly cw or only potatoes, ae represented ty the pane By tnd By respectily. The ds beeen Bese two pots long. the finger constraint. represent the eter poste combarations The cost of each embinaton of potatoes and ice must ad Upto t1a) Ram decides to buy more He, Fe wil have sete or fewer potatoes. The nt aetly owen by Rages ibe E, si ith pcs of plats (orl) ad 3h of ice (or), Ras Inge oft the ne ht defines the utr limits of is Opportunity se But the whole opprtariy st ager, I lo includes all points below the Inte onstsnt sine igre, he shaded are {G5 What do we mean by ‘ficent markets? Kon Markets” whee” any profit’ opportunites are eliminated. almost instanansousy are sid of ficient mat The common way of expressing thcelcem marie concept “There's mo such hing ws a rela” There ae "larly tines when prof portunies exist Someone has to be fi to get the ‘ews and some people have uicker ‘Nevertheless, news teovel ft and tere are thousands of insights, The general ‘iw that large proto mark. ‘Qe Explain the snd ‘normative economics’. Soe Pov coo end behaviour andthe operation ci ecvomie opens pdosrets t wher the ooes Sic god or bod se fo dent what exits snd how twos, What ‘timins he wage mt for le work? What would Papp we Sie tie coperas beste ta? The eres to nh qowtow etd ‘Rbjecte that con cer he ak of pontve roms. "ons normative economia at house of condi beaviour ae sip wher ys por rbd sl wher ther Seb ta Pe Normative enous svelte jdgesens and preipton fr cages of {Sm Sl th gerne ee gute oe ghrelin? ‘Soci medea boca we x ely be wveae ony te wih ears ‘slow some tiesold? Of coune, mow aomatve guesions involve postive ‘Surana To know whethe he goverment sod ke «parla acon, we uot now ist tea nd acd what he conagueee ely fo be Lor ‘impli we lower inp ty wl heb mor erpeton an ove poe, ‘G7. Distinguish between Fotve om Normative Genome? ‘At Difference betaen Ponto tnd Normative Economies 1 ostiveconomis sed on fcr and Noemie economic i bed (0 Sampo pee ome nonigh tori @ Thi the county in he werd ae China Example of Normative eos: Indi mit apt one chid‘porm to control its population growth, iy akfee (Te anaes ander Norma cos a civ n ne Rete ecco ote aw ee eee terete erotic Sse tng ee ey SNE RE Dasmay on te ore Cees aha on ee ae a pa A 7 Fr yin ee Reve oe oe Joe euen aes “ sr oe ee sala elt cry ett ce te Pere a ecomecerenaeieeeen Leesa eae enin ee eatin near tieameraes a Cee ewan oi oops (io TaADriant te wasn gned Sica te ete, sharma tarp tsar e (Ei rence 50 pr gn iy wl make ‘a with gmemmen sc per re pn Soe (Page 3 ‘oopeing marginal benefits and ForexmplConider an Aine dec 43 sandy. Spon tat lying se pane a a 2oaet plane across the county costs SS [UNIT EXPLORING THE SUBJECT MATTER OF ECONOMICS obits siting €10 lakhs In this ase, the average corto each seat is op which i, One might be tempted to cone Bat the Aine should never sll 3 Titre ice de 5.0, feel a atonal Asie can fen find ways to ase (eft by akag atthe mag agin that plane about oak of with trp Sat an standby Possenger wang at Ue Ete wil py 25,00 for USI Sen station the Aline man el the tikt to this standby ge th plane has py seats corto adding one more assess Tey ai Aldough te nroage cst offing a passenger €5.000, the eh ot is merely te coo fa Botte of king water that the extra ‘ucEger wil conume_ Ar long the standby passenger pays more than he ‘Riel cost sling the ick protae ‘Dis wy is water vo cheap and dlamonds so expensive? ‘or plain the Diamond Water Paradox Hamel wor we ann anes fr so eson people at ing to poy uct ore fora nord than fora hse ete The aon ata Pose’ lings to pay fora goed is Based on {he marin bn tht an er eo gp roel yd The marginal ett or tur depends om how any ane pan aleady fas. Water s ‘Scot but the marge fa ety glee tall Because water is ena By conta, no oe eel eave, but bens monde EeSo rave people conser gin! Bonet ofan extra lamond ob rg, ‘Ths epi why water ao chp and diamonds so expensive 10.12 How can governments improve market outcomes? ‘Kee One sss why we need the ‘St the ine an the nls mae frets i ead nd sap of sds in fe mae! o ‘auteur con work magic only the goverment enforces te reer {hdmi the sos that ae hay (0's market economy. Most ‘nporanty, mask canons need intone 0 enor property Highs" ‘estan own and conte sce rece “A anmer would not pow fod if he ec an. rp ob lay estat ‘wouldnt serve eos ned etnies pay toe ye [isn esrsteent company woud not rode DVDs fos peta ‘Slammer sed paying by sng eal copes, Yet Wares snother mace ‘Sd gnemment eve spel at tit omit “These wo bond reson forsgovemment nerve ns eonamy and dee thy soon of essen het pep SRE eo lt eho ‘rote efichry oto promote equal. Wat wt pace ea ier to ‘Sage he economic pl ro change how the p's dvi. Conia he {elec Alough the ive hand way ot tollecte ‘urcs to matimize the sono th con pl, hs not aay he eae Economist eh ter market alr ole stnon in hh te mat ‘nits own fast produce an etn alloeaton of enue A we wl oss one ‘ose cause of market fare i an eterably, whch i he impect eens ‘Peron’ cons on the wellbeing of = hr! person, Now consider the gal ofvon ten hn ndeying ict somes tcnleve SEND gprs necro weg pi ep edge ail 1 produce hogs a ne yy fr ins bs cht le ke mere a ne apy be plese willg Py moreto sae sche The ale band oes ovens tat eye has cece ene aun and teat fae Ti nguay my, eet sot, al fr goverment itervenon Fone tie flysch ae come tax andthe wee eer SS Te mae eu dino anon weg "Ain ny ao pl ce wedeate spain wing eamples (2006 Se eet bcs sures see an th canbe pt cna So oping ore optim tut lating te chances ‘eb Ts st ea es deo ‘ee. 3, Unt age 2 1.14 Why does the sncey fae the tade-off between efficiency and quality? Expiin, 017 Tans icc mans ht soc geting the maxima beefs rom cine natures Egat eae ot ne Sees edited ory Sooty mscys mabe eer word ficiency ree the sie of the SoeticpdEquaiy eer oy thee dvded i val om. Tn sce ae soll bre eiceny (rosy) a egy (nen Wier en fas rato ey gun econ, at tot maker he dation come and rescues ls fi tough the Torsone tae. Ts ponent for role wo ‘tae proces, bt he consequence ore poverty, thane “to aon Fane wl et be ad heme Tele Soran ct lea ny ena an be "G5. Why dow wade off ase btween acting and equality? (204 ‘aw lcs se bse on pete nese inert. Set gsm inn xl i fm = tt, mee compen s std ptr th gener nee eu ert nf treme on aly. ee horton wade of beten flat and wnemployae hom Tse ne ‘of monetary injections are = tmseaing te ont mene a econ an sats he ‘nll vel of spending nd ts edema fer pos sed sens € he ead ay ee ae ro pres tn tential cups th a Hie more wees tl poe larger quantity of goods and services, i (ay Mr Ning ea owe ney ‘his ine of easing ed re al cy tore \tade of between inflation and unemployment.” t® Uae Of shorecun, —— ae [UNIT EXPLORING THE SUBJECT MATTER OF ECONOMICS # 7 0.17 plan the Cigar Flow of Income model with the help of diag. or ‘Use an economic modelo show the How of money and goods and services tvough markets among households and fms "eatin eon emo lone of peopl engaged in many activites i ing woking nng anda and 9 on. The Ciclar Flow of TURE Sa olan how the deen pripans in the economy interact iheach othe : ed see “Even dng presents vel model of te economy called Cc Fow alngran ints oh the economy i spl into two types of decison REE So and towthald Pe produce goods and services using inp RES tour land and api (oedigs and machines). These inputs are {Ste actos af production Howsehols own the factors of production snd ‘sume a the gowds-and sree tat the firms produce households are tye and fre sles nparlar, households buy the output of goods tnd seins that me produce inthe mats fore acs of production, uso are eller and fins are buyer: nthee marl, house provide he pat tha is we produce foe and sarin, Te car Sow gram fers ample way of erganzing Eovcconomie eannctons tht cur between howsolls and frm in the ‘Sinn. The to lope tesa vw agus re sit but elated. The tern epee es of pat sd outputs Th Rowse el the use ‘Fite our and apd capa © he firme inthe markets for the factors of rotation Te fms tenets ors proce got and cari, which [Rtum aed to ouehoie in he mrt or goods and servis. Teeter op {ihc dapom presents the eonspding flow of money. Te howls pend smo youre avi he fm Teme sane of re boa to py forthe to uch as wages Wat ‘Siaue poirate tr comen nhs hems se members of hose = obi epee cNowehostw” Pe] ES = a rs + Rosterie Om EA UNIVEESIY SERIES O18 Dao acai dag 1 crn Ost teow of rds and sve Tin towing scsi: ys yyy a thee 00 (Rei fort reing i) eens apends 1000 2 {Mee ron re percent ewe of 1 nd. entity the parts of the model that rath Flow of Rupees foreach ine of il fos food eestaurant. hice. sd opportunity cos, Sean peo Sosmpatr aes rene sce to ea ne ey aenh ion See Tepee es Pood meanest SSSR eee Gey saeeeee on stnan Se nEe aes: : Fo oa gel eet pia gee age ar abner Tee icy the sone ces | by point A Or by moving some of the factors of production t0 the camera Indust fom the mobile UNIT: EXPLORING THE SUBJECT MATTER OF ECONOMICS # one adr, he economy cin produce 70 camera and 2000 mobile Pane epee by point 8 arr ees ae scarce, not every conceivable outcome feasible. For caer how sures a alate between the two dusts, the ear et oreduc he number fomeras and mobile phones epesented SPRENC Ene the echnology svaabe for manaacuring cameras and Or Ses the eamomy does nt have enough fhe factors of production to ‘Ep at evel of opal Wt the eure tha, he economy can produce IRE Sno ode the producto posit one, but cannot produce 22 Pena tents Ancucome bak to beefient te economy is Ailing a'tcan fom te scarce resource tht ae avalible Pinson (ther EEE) the predacton posity toner represent efficent levels of ‘pton ‘The production pill onder shows one tadecf that socket oe Goce we hove enced te ec poison the foie, the only way of ‘eSSucing mre of one good ito podce ofthe ler. Wien the economy Towson pt A to fn 8 fo ietanc, eit produces 100 more ames Tua expec of predcing 20 fewer mobile phones, The cost of something, viutyou pve upto gett Th called the opportnity east. The production only eer shows the oppor est fone ood ab measured infers Tine otter good When vcey moves rom pot Ato po, ves up 200 Arb pones to ge 100 wiboal camer Tha a pt A the oppertaity ru of GD comers e200 mobile phones Te proson possi rote Shows the te ff between the ups of ifeent gods ta given ne, but Ihe tade off can change ve tie For cap, sup « ecco advances inthe me phone nyc I mani of mabe phe a's way un ede pe took the evucenn ndr wan expen says sec osperaioa Foray grennumie cane, economyin nae remot ponent the coy doe pots ny be Pu Haale 10 canes med Pa he ftir say sae Bu he et of he edwin pouty fn rowan te gue Ta ee ‘lustaes economic growth, Society cn move production froma point on | foie Wa poodee Gear oasis ee2 aw and ephin a prodacion pny fonts fran cena 0S MART AML SUM wh happens to ths oer i vee Kl ifthe conomyneows? “es Thee sha Pratacton Stay Front eee ak st bed (GoF) Wa dase kilo tthe soos Gr punto, ark. pedcton pono PE sie PPE. Noe Sori ecscmy prs ely tend SS nana anos andro & sated Ba tn economy os ny ‘nie thew proton pote he cars te ae {8 User otuctin psy nr ethno een a ow isthe concept of efficiency slate to production possibilty frontier? ‘Ane, The idea of effcioncy i that an cutee efficent the economy ging ST'itcan from the scarce resoures has ‘sae terms of he practi possibility ifontir an ecient pont i » pot on the ont such as pont Ai We given igure ‘When the economy is sing rexoures ‘hcenly srconnotinezese the preuction ‘tone pad tot reducing the production ‘the other A poin isi the oti, sch {int By i efcet since more of one ond could be produced without reducing ‘Be peduction of another good. ‘Qin an economy only two goods, com and whest are produced. Draw the production possiblity curve forthe economy I ore al he factors are equally efficent nthe production of comm and wheat. i factors ae not aly eficent inthe production of corn and wheat ‘Why isthe shape ofthe production posit curve diferent in both the cases? ‘Ans. Production Possibility Frontier, So 18, Unit 1. Pages Seams nal (0 Wen al factors are equally efcint for both the comedies PPC carve wl have equa intercepts on the exes [UNIT 1 EXPLORING THE SUBJECT MATTER OF ECONOMICS #1 trimer ete (4) When the proction of corm ore efficent the intercept of corm ll be higher. 4 2. magne «society tat produces miliary gods and consumer go whch we wll call “gone and outer” a {0 Draw a prodation pony frontier guns and bur Using the cone {Sptot apport oat explain wy # mat ly hans Dowedrou spe. (9 Stow a point than anponate Forte economy te sce. Show 2 point that ese bat nef, (i ragine thatthe society hak two politi pate, called the Samaj Ser ot mtg mite) aa Baan rh van Staller military) Show a pint on Your production posi fonier thatthe Samay Seva Pay mph chose an Plat the Bans oo Eee (oy Imogine that an ngzesive neighboring. sila. Abs revul bth he Sama en snd the Bane Sede thet desired production of guns BY the sme amount Which party Iwould ge the Bigger Speen vend messed by the Intease rote production! Epi ‘Ans. iven gre shows prodction possibilty fone between guns and ‘rier bewed out becoue the opp ont of bate deers ot ow much bute and hw many gare te eno rucee Whe {Sr conomy producing 2 tS bute woe ad uhies bo Shc mang pu are ning wed to ter ech ae gee ren up is stall incense inthe proton of bate. Ta te er sep an the opportunity ost of predocing bes i igh ‘When the econo: prodings to uns workers and acne fet Sued to making bute ae being used take pun oo ec ut of as {en ve ng ncn proton oa: T the Foner s very Bat nd th opportny cnt pcg baer reduces these of itsye aie to achive as outside the (i Poin Ais imposible forthe economy ae cee Ps cay oe oe i ib CRG precio esl foes “sca me (i oa Se mp coer lt he wit ay gue and ‘Pachter The jn mh ne pi ie witha of Bate In fw gre eh iy Sea and an ce te eel of gue ty he some un he Suny Sra woud gt bigger Peace dividend Etiinerodcton Roby For och te pit H than out. Ars eal th edacont per amber gun saring at {nT ads osm ines tego ae prdced ith a pe 1.2 Epi the rol esumptionsin enol aayit ‘ns Economists ke rst for fling reson {) Tosimpiy compos aat, oreo o may nto rade, Conon ale tranplon at oly fo cous et while In ‘ely three same outst cing nthe we Te en tht hema wade betwen vo counts cn beeen ss abo eter o mul county ce (o Tomakereewa surpon i ery important gpg a ve he Pare ste nde tad, Fr ample sty growth of Sera {fod item cei cn sue range of epee tht helps {gow bce Say, study oun echt an eons an ‘Ssume tt reo the godt ot which he cue buying are ‘Ben dig me of aarp (i Diet ssompins an be mae to answer diferent problems under sty or expe eno astume ta pe re con in he ‘hort ran ut vary ithe ong run and cordingly ake ply Peeptn {3 How do eonomise apply the loge of cece fo eamine the per formance ofan economy Esa or ‘What do you mean by sent method of sady in economies? ‘Ans The approach made by economia aes cr sub sir tothe Theonly exception beng we of by econo in the digi er [UNIT PLORING THE SUBFECT MATTER OF ECONOMICS #13 2.26 Why do economists disagree on iues and give conflicting advice to policy maken? "Ant Economists do disagree about he ues they deal wth an donot give any unique salon Theron fortis areas aloes (9 Diferencs in making eoauation or judgement. An economy consi of erent typee of consumers and produces having diferent S000 ‘comic background. No unigee theory can expat thelr behvour oneal Siuarly markets or good sd erie can be inert © ‘rious degrees. The manner in whch goverent functions so 9 subj of eat Hence economists diferamongthemeeves in adopting ® particular model to explain he working of such economic agent (0) Diferences in estimation of ones anomie ave ven arguments ‘with respect fo use of constant valve or cument-alve of produce Since songs in prices do take place, valve of produce feep changing resulting in contcting picture about rel sal wellare “Any: paley ‘led increase social welfare most conser ts diference. Sada, ‘quantitative measurement of rtums on investnet canbe sujet ‘ertny Simla, teres dsagreement on eof tae, well and So 0 Bons tr rte me Serge it mentair ty mee = elena soe ard goatee oan ro Pe aaa cs nore petesnabiae aceasta pease eee faces ern oes oer A Re Sage Ra Sse, tev tofu advantage in he production of ALL the gods?) aoe Tee twa ap oft nei ae say SEL eee te finite crgah ciieerercriame ‘eos a fate Oe Ba Pend us rachecnen Ghana 10 units of route required to produce Soe fon af Cocoa and 23H{5] mie of remus eu to prods ae fn of Re. Padon Possibility i () 20 tans of Caco ae no Faria 0 2 tor fC Rice (i) 15 tons of Rice and no Coeoa,Se topes tn ws ee to rr id sn esa ipiveausisawawmawea ee raeee vr uch u ree es sm et Gv ne a on lin en ee pent een Ser none, Eres mart Coc aes ahs Soa eas i ona ee Was/ion waren Se Kore ‘onion | Santon {Sth 20 ts of nh Ug 100 | Sito Rr on 100 Unto on ie ‘Gh 7 Pree wt teas ——————} Ti ‘Gh for Cas 10 an Fr Res SOT a ‘Stu Keres er We on a ssa paras 5 tof Coca? tn of Rx ae ational pred by ening stl ad th uns roti nd an the peat (All unis of about ae hoomgentous, (3 Latour i. perocty mob wit inthe county but it ‘emote between diferent count, ieee! (i) There fll rployment in counts Produced by faba, (iy Production of goods takes pace une constant cot (Gs) Reardo assumes that ibotr the oly Sera ech loducton measured in terms abou | en (Bh cour ta fond Gury of a an change the | ‘with Which a. uses cbt ee county wa rou lead on income dstbution within Ricardian model, research mgt tha the eons aremmont efficient in and tat fe trade ts betel fo Despite the miaton wil export the goods they trading counties [UNIT EXPLORING THE SUBJECT MATTER OF ECONOMICS 15 0.28. Why do people trade? Describe using Ricard’s theory of comparative advantage. ‘Anu Acoring to Riard's theory of comparative advantage, specialization and fc trade wil benefit al trading partes, even wen some afe“tbclutely” move sffcient producers than other. Suppose Chaitanya can make 1 books er day nd ‘Bhim can make only 4. Also suppose, Chatanya can make 10 pene per dey and ‘Bhim can make only 8. A producer ae an abwolte advantage over anher in the prodcton of god or service i he or she ean proce the good or sevice wing fewer resources including time. Sace Chaitanya can take more books per day than Bhim, we say tate as an absolte advantage in he proton of books ‘Siar, Chaitanya hasan abeolate advantage oves Bhi i the production of pens. Despite the abeute advantage in bath the goods, Chaitaya would be Pwlng f0 wade wit Bhim Besse his tne i Lied and this creates an ‘portunity cost. A producer has a comparative advantage over anole inthe [reduction ofa good ar service, fhe or she can produce the ood or seve a ¢ lower oporturity os Fist think bout Bhim. He can produce § pars per day, oF he cuba 4 books. To get adional pu, he must pve up makang& books, “Thi for Bhim the opportunity cor of 8 pens is 4 Books Think Ret about CGaitarya, He can price 10 pee per day, er he can make 10 book He thas {ges up I book foreach adlianal pes for the opportunity cost of 5 persis 6 tooks. Bhim has a comparative advantage over Chaltaya ithe ‘reduction of pens because he giver up only Boake Torun ational 8 peo, ‘whereas Chaitanya gives up 8 books, The Mire below shows how tate can Tend to gine im consumption for ba the agents.