1. China and the US both produce ships. China can produce 15 ships or 17 airplanes in one month, while the US can produce 10 ships or 27 airplanes in one month. It takes China 2 days to produce one ship versus the US rate of 3 days. China has the absolute advantage because it can produce ships at a quicker rate. It takes China 1.8 days to produce an airplane, while it takes the U.S. 1.1 days to produce an airplane. Therefore, the U.S. has absolute advantage because it can produce airplanes at a quicker rate. Days needed to produce 1 product Airplanes Ships The U.S. 1.1 days/plane 3 days/ship China 1.8 days/plane 2 days/ship • The opportunity cost of 1 airplane: U.S. .36 ships China .9 ships • The opportunity cost of 1 ship: …show more content…
has a lower opportunity cost than China for producing airplanes and therefore has the comparative advantage in that industry. China has a lower opportunity cost than the U.S. for producing ships and therefore has the comparative advantage in that industry. It is mutually beneficial for China to produce ships and the U.S. to produce airplanes. Comparative advantage is more important than absolute advantage because it allows both parties to receive a good at a price that is lower than its opportunity cost. It also allows for specialization which makes production more efficient. 2. One determinant of demand is price. Per the law of demand, all else equal, when the price of a good increases, the quantity demanded decreases. Alternately, when the price of a good decreases, the quantity demanded increases. When the price of a good increases or decreases, it causes a movement along the demand curve. Other variables that determine demand are prices of related goods, income, tastes, expectations, and the number of buyers. A shift in the demand curve happens when there is a change in one of these areas. If the quantity demand increases, the demand curve shifts to the right. If the quantity demand decreases, then the demand curve shifts to the left. The change in demand is the curve shift. The change in quantity demand is the change in the number that is being