Microeconomics Principles - Essay Example

Moreover, this paper will present real events in order to present the ideas in a way that is easy to understand. Gains from trade In a decision to get a haircut, Gains from trade can be understood through determination of the decision made by a consumer depending on the other services available. Therefore, a decision to have a haircut can result to consumers having their lives than they would if there was no trade. In this case, there is need to explore the simple example concerning a situation involving two service that are traded (Broadstock, 3).

For instance, considering a situation where there are two service providers such as a barber and a tailor that are located in different location. Gain from trade can be effectively illustrated in a situation when each service provider can only offer one service only. In this case, the barber can only offer haircutting services, while the tailor can only offer dressmaking services. The gains from trade occur in a situation where the barber realizes that he or she needs some clothes and that would call for services from the tailor (Eicher, Mutti and Turnovsky, 1).

On the other hand, the tailor can realize he needs a haircut and this would call for services from a barber. In fact, this is in a situation where the barber and tailor are able to gain from trading with each other (Broadstock, 4). On the other hand, there are situation where each of these service providers can offer both services; in this case, the tailor and barber have the skills to of hair cutting and dressmaking. Approaching this matter with another perspective, these service providers can collaborate and work together, thereby consuming similar amount of services without occurrence of trade.

Opportunity cost This can be discussed in reflecting on same example used in the previous discussion. In this case, the barber and tailor had absolute advantage in the process of offering haircutting and dressmaking services to customers. However, the absolute advantage forms a basis of understanding the opportunity cost, whereby this can assist in determining occurrence of the trade. Therefore, opportunity cost is regarded as the cost of forgoing a particular service or good in order to obtain something else (Broadstock, 6).

For instance, the when a barber has the ability to offer dressmaking services, he can decide to forgo this making his own dress at a lower opportunity cost he can decide to seek services from a tailor. In fact, the concept of opportunity cost is significant in determination of the amount of benefits derived from trade existing between two service providers. In this case, this is an indication that situation where two service providers are facing similar opportunity cost, there are increased chances of gains from trade occurring.

Opportunity costs increases in situations where the services or goods involved increases in terms of production (Merrewijk, 30). This is presented through a PPF (production possibility frontier), where an increase in the opportunity cost leads to bowing out of the PPF, thereby forming a circle shape. In situation where the opportunity cost are constant despite the services or goods produced, the PPF remains constant, thereby taking a straight line that is triangular. Decreasing opportunity cost is presented in a PPF by a subsequent decrease in the production of goods or services; in fact, this is depicted as PPF takes a bowed shape that resembles a crescent moon (Merrewijk, 30).

Price elasticity of demand Understanding of price elasticity of demand can assist in evaluating the responsiveness of demand in terms of changes in prices for a given commodity, however, it is indispensable to recognize that in situation where