Chapter 3 Lecture Notes
Chris’ Production Pat’s Production
Fish Bread Fish Bread
8 1 3 0
4 3 1 2
0 5 0 3
Alone Chris can only produce up to ten fish or up to five loaves of bread.
Alone Pat can produce up to three fish or up to three loaves of bread.
Without trade, Chris and Pat are limited to the amount of items that they can produce.
When free trade is allowed both Chris and Pat can be better off.
If Chris specializes in fish, and Pat specializes in bread, and they are allowed to trade with each other
then they can both be better off.
If Chris wants seven fish and two loaves of bread, while Pat wants just three fish and one loaf of bread
then they can trade to make it happen where they could not reach those goals on their own.
By giving Pat three fish and trading it for two loaves of bread, the two have now both reached their
previously unreachable goals.
Trade can make everyone better off. There does not always have to be a loser.
Exchange vs. Free Trade
-there is no specialization
-Only trading existing items
-Specialization in production
-Specialize in the lowest cost, most efficient production.
-Fish -Chris: cost of one fish = 0.5 bread
-Pat: cost of one fish = 1 bread
-Chris specializes in fish because there is a lower opportunity cost.
-Chris: Cost of one bread = 2 fish
-Pat: Cost of one bread = 1 fish
-Pat specializes in bread because there is a lower opportunity cost than chris.
-Chris has an absolute advantage in both goods because he can make more of each than Pat.
-Chris still gains from the trade because he is able to specialize in what he is better at.
Production Possibility Frontier (PPF)