Class Notes (1,100,000)
CA (650,000)
UTSG (50,000)
ECO (2,000)
ECO101H1 (700)
Lecture 2

# ECO101H1 Lecture Notes - Lecture 2: Gumdrop, Absolute Advantage, Comparative Advantage

Department
Economics
Course Code
ECO101H1
Professor
Jack Carr
Lecture
2

This preview shows pages 1-2. to view the full 6 pages of the document.
Production Possibilities Frontier (PPF)
1. Scarcity (attainable vs. not attainable)
3. Opportunity cost
Key Application
Used to illustrate the benefits of trade, between countries and between individuals
Constant Opportunity Cost
Gumdrops Chocolates
10 0
8 1
6 2
4 3
2 4
0 5
1. Switch from all gumdrops to all chocolates
Opportunity cost of one chocolate = (10 / 5) = 2 gumdrops
2. Switch from all chocolates to all gumdrops
Opportunity cost of one gumdrop = (5 / 10) = 0.5 chocolates
Straight-line (linear) PPF implies that these opportunity costs do not change along the PPF
To simplify examples in class:
I assume that opportunity costs are constant along the PPF (and, thus, the PPF is linear)
For discussion of PPF that is not linear, see Mankiw, Chapter 2, pages 26-28
Key Result
An individual (or country) has a comparative advantage in an activity if the individual
(or country) can perform that activity at a lower opportunity cost than anyone else
The existence of comparative advantage is the key to:
o Specialization
Example
Production Possibilities (per week)
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Cloth Corn
John 10 2
Jane 8 4
John has an absolute advantage in the production of cloth (i.e., is more efficient in the
production of cloth)
Jane has an absolute advantage in the production of corn
PPF: John and Jane
Opportunity Costs of Producing One Unit of:
John
Opportunity cost (1 cloth) = (2 / 10) = 0.2 corn (give up / get)
Opportunity cost (1 corn) = (10 / 2) = 5 cloths
Jane
Opportunity cost (1 cloth) = (4 / 8) = 0.5 corn
Opportunity cost (1 corn) = (8 / 4) = 2 cloths
Observations
John has a comparative advantage in the production of cloth (since he can produce cloth
at a lower opportunity cost, 0.2 corn versus 0.5 corn)
Jane has a comparative advantage in the production of corn (since she can produce
corn at a lower opportunity cost, 2 cloths versus 5 cloths)
Before trade: John and Jane each divide their time equally between the production of cloth and
corn
Cloth Corn
John 5 1
Jane 4 2
Total 9 3
Suppose John and Jane specialize in the production of the good in which each has a
comparative advantage (and produce only this good), and then agree to trade