Comparative advantage is when a country can produce more of a certain type of output in relation all of the other things it produces. Another example, the U.S. and China might both be able to produce 5 thousand performance chips, but in relation to their other output China is producing 5/10,000 of salsa, and the USA is producing 5/100,000, so China has comparative advantage.
If either the U.S. or China specialized in output production for which they have comparative advantage the global consumption/production profiles expand and everyone is better off.
3. The demand curve shows that price and quantity demanded are inversely related. Briefly explain the two justifications the income effects and substitution effects play in this relationship?
Income Effect: Demand can be explained that unexpected price changes affect the purchasing power of consumers. If the expected price is lower than forecasted, income now allows the consumer to purchase more than if higher pricing. An unforeseen cost increase would cause the consumer to purchase less than the desired outcome.
Example: When an individual goes to a grocery store to buy groceries and finds one of the products they intended to buy being reduced in price (a special sale), it makes them feel wealthier since more can now be purchased or more money left over.
Substitution Effect: If the price of a good is lower than what was originally expected, then that good becomes more appealing as an opportunity to save mone...
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...avior by businesses is fixing prices which are prohibited by the law regarding competition. The reasoning for cartels being unstable is that many price fixing or market sharing agreements eventually collapse. Examples of these collapses are listed:
• Firms that are not a cartel entering into the industry creates fresh competition which creates a disruption.
• Government agencies have been especially active in trying to break down cartel behavior and tighten laws in order to bring exposure to price fixing.
• Over-production to drive prices and profits down which breaks the price fixing.
• Falling demand creates excess capacity in the industry. Example, during an economic downturn/recession - the classic example here is the deep tension within the OPEC oil cartel caused by the world economic recession which is causing a steep fall in the global demand for crude oil.
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