Comparative and Absolute Advantage-Free-Samples for Students

Questions: 1.As a producer, why is it important to consider the Price Elasticity of demand of your product when setting the price you are going to charge? 2.Explain the difference between Comparative advantage an Absolute advantage. Answers: 1.Significance of price elasticity of demand Price elasticity of demand of goods is a measurement that reflects the relation between the percentage change in quantity demanded of goods and percentage change in goods price (Reisman, 2013). The companies estimate price elasticity of demand for commodities that helps in predicting the affect on sale of product pricing (Hubbard et al., 2012). It facilitates the firms in making proper revenue projections and generates accurate budgets. However, this improves the business operation and financial performance. Demand elasticity can be of different types that includes- income elasticity, cross price elasticity, own price elasticity. A product can be perfectly elastic (e=), perfectly inelastic (e=0) and unitary elastic (e=1) (Baumol and Blinder, 2015). Price elasticity of demand is important for each producer as it provides an idea about the consumers consumption of goods due to price change. Every producer strategizes to decrease the goods price if the demand for good is price elastic ( Mankiw, 2014). On the contrary, producer raises the goods price if the goods demand is price inelastic. These strategies assist the producer in attaining higher profit and compete with the other manufacturers. If the demand for good is inelastic, a certain rise in its price will lead to rise in total revenue with quantity demanded of goods remaining unchanged. On the other hand, in case of elastic good, a rise in quantity demanded will have no effect on goods price. This is illustrated with the help of the diagram given below: Figure 1: decrease in price due to increase in supply with quanity remaining constant in case of inelastic demand Source: ( Created by author) Figure 2: Increase in price due to decrease in supply with quantity remaining constant in case of inelastic demand Source: (Created by author) Figure 3: Increase in quantity due to increase in supply with price remaining constant in case of elastic demand Source: (Created by author) Figure 4: Decrease in quantity due to decrease in supply with price remaining constant in case of elastic demand Source: (Created by author) Difference between comparative and absolute advantage Comparative and absolute advantages are two vital theories in international trade. Absolute advantage refers to the ability of the nation for producing certain commodity in efficient way than another nation. On the other hand, comparative advantage refers to the capability of the economy to produce certain product with less opportunity cost than other economy (Laursen, 2015). Trading between two nations does not gain mutually in case of absolute advantage whereas in case of comparative advantage, both the nations benefit mutually from trading. Absolute advantage considers advantage in producing abundant goods while comparative advantage considers nation overall production during a particular period (Schumacher, 2012). Comparative advantage bestows a firm the ability in selling goods at low price from rivalries for realizing higher sales margins while absolute advantage facilitates in comparing productivity of various manufacturers. Specialization refers to as the tendency of the nation to specialize in certain a product for which trading is done for some other product. Specialization benefits the country in having higher economic efficiency and growth opportunities for other sectors. Specialization in fabrication of products in which the countries have absolute advantage assists two countries in doing trade (Feenstra, 2015). On the other hand, exchange rate also helps the countries in enhancing international trade. However, weak domestic currency motivates export and creates imports highly expensive References Baumol, W. J., Blinder, A. S. (2015).Microeconomics: Principles and policy. Cengage Learning. Feenstra, R. C. (2015).Advanced international trade: theory and evidence. Princeton university press. Hubbard, G., Garnett, A., Lewis, P. (2012).Essentials of economics. Pearson Higher Education AU. Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization.Eurasian Business Review,5(1), 99-115. Mankiw, N. G. (2014).Principles of macroeconomics. Cengage Learning. Reisman, D. (2013).The Economics of Alfred Marshall (Routledge Revivals). Routledge. Schumacher, R. (2012). Adam Smith's theory of absolute advantage and the use of doxography in the history of economics.Erasmus Journal for Philosophy and Economics,5(2), 54-80.