The Evolution of Comparative 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. Answer: Introduction This objective of this paper is to analyze the significance of price elasticity of demand for producer in setting the product price level. Producers evaluate product price elasticity in order to attain higher revenue and profit. It also helps the firms to improve their financial performance and expand their business. This study also highlights on the comparison between comparative and absolute advantage. In addition, critical evaluation on the opportunities of specialization and exchange is also discussed in this study. 1.Importance of price elasticity of demand Price elasticity of demand refers to the sensitivity of the demand for quantity of goods with respect to its price change. Firms appraise price elasticity of demand for goods for predicting the impact on goods sale pricing. Elasticity of demand depends on various factors that include nature of products, consumers income level, closeness of substitutes product, price level. Price elasticity of demand is mainly of three types- elastic, unit elastic and inelastic. Demand for goods are said to be perfectly inelastic if the price elasticity of demand becomes equal to zero. Goods are unit elastic if the elasticity of demand becomes equal to one (Rios et al., 2013). On the other hand, products are meant to be perfectly elastic if the demand elasticity becomes more than one. Price elasticity of demand is significant for every producer as it confers an idea about the buyers consumption of goods due to change in price. In addition, it also assists the firms in taking decisions on the products optimum price and attains higher revenue. If the demand for certain product is price- elastic, then the producer strategizes to reduce the product price in order to attain higher revenue.Likewise, if the demand for the commodity is price inelastic then the producer wants to raise its price for achieving higher revenue and profit. Price elastic product reflects horizontal demand and supply curve, whereas price-inelastic product represents vertical demand and supply curve. If the demand for the commodity is perfectly inelastic and its supply increases or decreases, then price lowers or rises accordingly with quantity remaining unchanged. In case of elastic demand curve, increase or decrease in supply results to decrease or increase in quantity with price remaining constant. The diagram below explains the fact: Figure 1: Change in price due to inelastic demand and supply change Source: (Created by author) Figure 2: Change in quantity due to elastic demand and supply change Source: (Created by author) 2.Difference between comparative advantage and absolute advantage Some differences between comparative and absolute advantage are: Absolute advantage explains the specific countrys ability to produce products at low cost for each unit while comparative advantage refers to the countrys ability to produce commodity at low opportunity cost (Levchenko and Zhang, 2016). Trading between two countries does not benefit mutually in case of absolute advantage whereas in case of comparative advantage, trading mutually benefits both the countries. Absolute advantage considers advantage in producing abundant goods while comparative advantage considers nation overall production during a particular period. A nation can get opportunities and benefit from specialization and exchange rate. Specialization defines as the countrys tendency to specialize in some goods for which trading is done for other products (Feenstra, 2015). Specialization benefits the country in having higher economic efficiency and growth opportunities for other sectors. Exchange rate enhances international trade and effects on trade surplus. However, weak domestic currency motivates export and creates imports highly expensive. On the contrary, a nation with strong currency impedes exports and creates cheap imports. Specialization negatively influences the economy by hindering trading activities (Schumacher, 2012). Risk of unemployment increases if the country is reliant on particular industry and their prices reduces. On the other hand, exchange rate creates deflation and policy conflicts in economies. Conclusion It can be concluded from the above study that demand elasticitys differ among various goods. In case of substitute and luxury product, demand is perfectly elastic but demand becomes inelastic in case of necessity good. In case of inelastic demand curve, change in price and supply does not affect quantities. However, in case of elastic demand curve, change in quantity does not affect the product price. In addition, both comparative and absolute advantage reflects how a nation benefits and creates opportunities from trade if the economy has low production cost in a particular product. However, specialization and exchange rate also affects the economy both in positive and negative way. References Feenstra, R. C. (2015).Advanced international trade: theory and evidence. Princeton university press. Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement and welfare implications.Journal of Monetary Economics,78, pp.96-111. Rios, M. C., McConnell, C. R., Brue, S. L. (2013).Economics: Principles, problems, and policies. McGraw-Hill. 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.