relative supply and the relative demand curve under free trade but before than that uh we need to define what absolute advantage and comparative advantages we've already defined that in the earlier recordings let us define it one more once more so absolute advantage absolute advantage well if there is a country and which is going to require less amount of factor less amount of units in order to produce a particular good then that country has an absolute advantage in that right for example if a country requires less amount of labor to produce a good it has an absolute advantage in that particular good right then the other country so please write this if a country requires less amount of labor less amount of labor to produce a good in such a country has an absolute advantage in the production of that then it has has an absolute advantage over the other country over the other country so if we say that alc is less than a lc star that is the unit labor requirement in order to produce one unit of cloth in in home country is less than the unit labor requirement to produce one unit of cloth in the foreign country then home has the absolute advantage in the production of cloth so wherever i'm going to use star that means foreign right and lw less than a lw star that is the unit labor requirement in the production of wine in order to produce one unit of wine in home is less than the unit labor requirement in order to produce one unit of wine in forest so here we are assuming that home country has an absolute advantage in both cloth and wine right cloth and wine or cheese in mind so home country has an absolute advantage in the production of both cheese and wine in the production of both cheese and white so this is what absolute advantages right this guy is what absolute advantages what is comparative advantage so if i have the lower opportunity cost in the production of cheese as compared to the foreign country then i have a comparative advantage so it's not about the unit labor requirements about the opportunity cost so if my opportunity cost in the production of cheese is lower than the opportunity cost and the production of cheese in the foreign country then the home country has the comparative advantage in the production of cheese right home has a comparative advantage in the production of cheese right if the opportunity cost of producing cheese lc by alw is less than lc star by less than oh lw is is is less than lc star by air f star so the opportunity cost of cheese is less in home is less in home right as compared to the other let's compare to fall okay as compared to foreign so that is what the comparative advantages right we have already seen the case of your uh the relative supply and the relative demand curves in the otaki equilibrium right so we have seen that and we know this that since there is a perfect competition in the labor market so the wages would be equal to the value of the marginal product so i give you the different logic if bc is equal to wc into alc or you can also write that wages you will i mean a form will be employing labor up to the point where the wages are going to be equal to the value of the marginal product right so you can also write it this way that due to perfect competition due to perfect competition in the labor market wages in the cheese industry would be equal to the value of marginal product of labor in the cheese industry so what is the value of marginal product of labor price of cheese into mpl price of cheese into mplc but mplc is what one upon right mplg is one one upon a and c that is mpl is telling you if you employ one more unit of labor how many uh more units you can produce right in order to produce and this is telling you what is alc telling you elc is telling you the unit labor requirement in order to produce one more unit of cheese how many labor is going to be required right okay and similarly ww is equal to pw upon a lw similarly w w is equal to p w upon a double okay now let us talk about and we know this beta that you have the there is now a trade so there is a foreign country as well right so we will write the world relative supply curve world relative supply so the world relative supply curve is the quantity of cheese supplied by all countries that is home country in the foreign country upon the quantity of cheese sorry quantity of wine supplied by all countries that is home plus foreign that is the world relative supply curve so the relative supply and at each relative price of the cheese that is pc by pw so given tc by pw what is the quantity supplied of cheese by home plus quantity supplied of cheese by foreign upon quantity supplied of vine by home plus quantity supplied of vine by w stars that is at each pc by pw what is the relative supply so this is the total supply of cheese in the world market by home and foreign together this is the total supply of wine in the world market by home and foreign right so you have different cases out here case one and beta we have also assumed that home has a comparative advantage in the cheese production so alc by alw is less than a c star upon a l w star so we know this right so this is what my assumption is this is what my assumption is so the first case which i will take is that if pc by pw is less than a l c by n if p c by p w is less than a l c by a right then what happens let me just put this here this is the qc plus qc star all upon qw plus qw star this is pc by pw and here you have a l c star upon a l w star and here you have a l c upon a and w now think about it if if pc by pw is less than a lc by lw then naturally it is less than a lc star by lw star as well naturally it is going to be less than alc star by lw star right so in home since p c by p w is less than a l c by e l w home is going to produce only wine just think about it the relative price of cheese is less than the opportunity cost of cheese in very simple terms price is less than the cost why will you produce such a commodity you won't you will produce the other commodity foreign if pc by pw is less than a lc by lw and alc by lw is less than elc stand by alw star then it has to be less than so here also the relative price of cheese is less than the opportunity cost of producing cheese and foreign so foreign will also be producing only wine right foreign will also be producing only wine so there is no cheese production here no cheese production out there right no cheese production so if there is no cheese production you are sitting at o let us let me just call this point as a and i am here so this is that part of the relative supply curve okay that is case one [Music] case two case two if dc by pw is equal to alc by a w but if pc by pw is equal to alc by lw and alc by alw is less than alc star by lw star so this definitely implies that bc by pw is still less than l c star by a l w star it is less than l c star by air double star so as far as home is concerned home country is indifferent between producing financies right as far as foreign countries concerned foreign country will still be producing almighty foreign country will still be producing almighty right foreign country will still be producing all mine so uh you can be between let's say point a if if what do you call foreign countries still going to produce all wine you will still be at point a definitely and home is indifferent between producing wine and cheese and home is also producing let's say all wine then you are definitely at point a right but supposedly if home produces cheese home produces cheese also and foreign is of course not going to produce cheese foreign is not going to produce cheese at all so let's say the maximum amount of cheese which the home can produce is qc and foreign is producing just all wine so this is what qc by qw star is listen to me again listen to me again so when will you be at point a home is indifferent between producing cheese and wine so foreign is definitely going to produce wine only so foreign is producing wine here home is also producing wine you are here at point a home can also produce all all wine hair rolls but supposedly home produces all cheese and foreign is still producing all wine foreign has to produce following in this case it doesn't have a choice so in this qc plus qc star how how we are getting this you have qc plus qc star upon qw plus qw star so this point you are getting when foreign is not producing cheese at all qc star is safe and this point you are getting when home is not producing fine at all this point so the relative supply of cheese is what in in in this market in in the world is qc by qw star so this is what you have home can also produce something in between spell right so if it produces only cheese if it produces so if home is going to produce only wine we are at point a if home produces only cheese beer at point b right so you might write that point also if home produces only wine foreign is definitely producing wine foreign doesn't have a choice if home produces only wine we are at a if home produces only cheese we are at b guys i'm again telling you foreign is only going to produce wine right so if home is also going to produce wine you're going to be here you're not producing anything of cheese but if home produces cheese were here you can have some convex combination of wine and cheese also out here okay this was your case too case three right now the relative price of cheese is greater than the opportunity cost of cheese in the home country but the relative price of cheese is still not greater than the opportunity cost of cheese in the foreign country right that is case three relative price of cheese is greater than the opportunity cost of cheese in the home country but relative price of cheese is less than the opportunity cost of cheese in the foreign country so you have the home country and you have the foreign country so if relative price of cheese is more than the opportunity cost of cheese you'll say fine i will be home is going to produce only cheese no home is going to produce only cheese and if the relative price of cheese is less than the the opportunity cost of cheese foreign we say why will i produce cheese relative prices lesser i will produce only wine foreign is going to produce only one right so there is in this case this is the first case where you have the complete specialization this is the first case where you have the complete specialization right with respect to comparative advantage so home has the comparative advantage in cheese and this guy foreign has a comparative advantage in y right and home has a comparative advantage in cheese and the foreign has the comparative advantage in white right well we are at where we are at pc we are at bc uh so home is only because with a pc by pw is lying here now pc by pw is don't mark this pc by pw is lying here so it is greater than or your alc by a w but less than a l c star by a plus so for all of these this is going to be the case for all of these prices this is going to be the case is your third case when pc by pw is going to lie here then home country is going to produce only cheese and foreign countries going to produce on devices fourth ps4 if pc by pw is equal to alc star by a l w star right so the moment p c by p w is equal to a l c star by a l w star so definitely it is greater than a l c by a l double so p c by p w is definitely greater than alc by lw because what because alc is less than alw star guys you are saying lc by a w is is less than lc star by lw star so if tc by pw is going to be equal to this so definitely it is greater than a lc by a alc by lw is going to be greater than alc by alder so what is going to happen in the foreign country and what is going to happen in the home country so foreign countries indifferent between producing violence sheets now because the relative price is same equal to the opportunity cost of g's but here relative price of cheese is greater than the opportunity cost of cheese so home country will be producing only cheese right home country will be producing only cheese right foreign is indifferent between cheese and wine and home country is going to produce only cheese so just think about it i will also write it this way so if it i'm talking about the foreign country here right if if foreign produces both then relative supply is what qc plus qc star home country is only going to produce qc then this is going to be the relative supply qw star and we are beyond point c and we are beyond point c right if foreign produces only wine then to it is simple you are at c because home country is going to produce just qc foreign country is going to produce q q w star and we are at c right and a foreign country produces right if foreign country produces only cheese then this is going to be one foreign neither home is producing wine nor foreign is producing by so this is going to be infinity relative supply curve is infinity out here relative supply curve is infinity out here so for example you have a curve like this you have a curve like this you're with me you have a curve like this out here and uh the last case is simple if pc by so if pc by pw is equal to lc by a w star you can be here at this orange part but if pc by pw is going to be greater than lc star by lw star then it is definitely greater than lc by lw also so relative price of cheese is greater than the opportunity cost of cheese in foreign so foreign will be producing only cheese relative price of cheese is naturally greater than alc by l there is opportunity cost of cheese in the home home will also be producing oranges right home will also be producing only cheese is 5 if pc by pw is greater than lc star by air double star then it is definitely greater than a lc by a w also because alc is less than a l c a l c by a w is less than a l c star by a w star right if this is the case then both home and the foreign country produces wine no produces cheese why why produces cheese right so opportunity cost of cheese sorry price the relative price of cheese is greater than the opportunity cost of cheese will be producing only cheese right and rs is in finite is infinite rs is infinite so this is the way you will draw the relative supply curve of the world relative supply curve this is the way you will be drawing and how do you write the word relative demand curve so at every pc by pw there will be the relative demand for gs also which is qc by qc plus qc star upon uh qw plus qw star right so what is and we will be assuming that you will have a downward sloping relative demand curve right so it though downward sloping relative demand curve is actually substitu is actually um implying the substitution effect right it is reflecting the substitution effect that if pc by pw is going to increase it means relatively cheese has become uh expensive so when relatively cheese has become expensive you will be consuming less of cheese you should be consuming less of g so that means the relative demand curve is downwards so you can straight away have a demand curve let's say like this html which so you have like this as a demand curve so this is what my relative demand curve is relative demand curve so as pc by pw is going to increase substitution effect will say relatively cheese has become expensive you should be consuming less of it that is the reason you have the downward sloping relative demand curve and the equilibrium price of cheese and and what do you call cheese and wine equilibrium relative price of cheese and wine is shown by the intersection of the demand curves and the relative demand curve and the relative supply curve that is here at this point this is the equilibrium relative price of cheese and y that is pc by pw star so this i call this as e this point where they are intersecting this is what e is so in this recording we have learned how do you define the absolute advantage and comparative advantage and how do you derive the relative supply curve what is the relative demand curve and how do you get the intersection how do you get the equilibrium relative price right we'll take the discussion further in the next class thank you