Hello. In this video, we will be covering Chapter 2, and this chapter looks at the Production Possibilities Frontier Framework. Okay, so as its name implies, the Production Possibilities Frontier, or PPF for short, it's a graph that shows all of the different combinations of output that a country or an economy can produce, given two things, given the available factors of production or inputs and the current state of technology. So a PPF can either be a straight line or it may be bowed outwards. When a PPF is straight line like this, so it's some good X on the X axis, some good Y on the Y axis, a linear PPF like this indicates that there is a constant slope. And so there are constant opportunity costs or tradeoffs between producing these two things. So for each pound of butter, for example, that I would be producing, I would be giving up the same number of guns in production. And remember, guns and butter from the previous chapter refers more so to government spending. So this is like guns refers to spending on military or defense and butter refers to spending on consumer items like roads, highways, education, things like that. On the other hand, when we have a PPF that is bowed outwards, so another terminology for bowed outward is concave downward. So a PPF that is bowed outwards indicates that there are increasing opportunity costs of production. So in this case, the more butter that I would want to produce, I would be giving up more and more guns, not the same number of guns for each pound of butter that I'm producing. So, for example, we can see that the opportunity costs are increasing by seeing how the slope progresses or changes as we move along the x-axis. So, when we're closer to the origin, here at point B, So for smaller values of whatever we have on this x axis here, the slope tends to be relatively flat. So at B, it looks like the slope might even be zero. Right. So like over here, it's relatively flat. So this indicates we have a smaller slope. And then as we move along the x axis to a point like D, the slope is starting to get steeper. So the slope is larger in absolute value. So we know that this is a negative slope, but in absolute value, it's larger than it is at point B. And then at point C, the slope is even larger or even steeper. So the steeper the slope, the higher the opportunity costs. So it means that we are giving up more and more of good Y in order to produce each additional unit of good X. Okay, so let's start off with an example, and this is the hunter-gatherer example. So as we'll plot these points, we'll see that this example will have this bowed-outwards PPF. So suppose you have five hours in the day to work, and you can divide this five hours between two activities, hunting rabbits and gathering berries. So if we look at this table here, It shows how many rabbits we can hunt and how many berries we can gather based on how we're allocating the five hours of time. So in this first scenario, scenario A, we're saying, okay, assume we're spending all five hours hunting. Then in the five hours hunting, we're able to hunt five rabbits. And because we're not spending any time gathering berries, we have zero berries. In the next scenario, we're now spending one less hour hunting. So we're spending four hours hunting and that fifth hour gets allocated towards gathering berries. So in scenario B, in the four hours hunting, we're able to hunt four rabbits and in the one hour that we spend gathering berries, we're able to gather 100 berries. So similarly, as we're going down each row, we're spending one less hour hunting. And that hour instead gets allocated towards gathering berries. So here we have 3 and 180. So in the two hours gathering berries, we gather 180 berries. And in the three hours hunting, we hunt three rabbits. And then the last scenario over here, we're spending all of the five hours gathering berries. So scenario F. So, in the five hours spent gathering berries, we're able to gather a total of 300 berries. And because that leaves us with no time to hunt rabbits, we have zero rabbits. So, over here, this is just showing all of these points plotted. So, we can see that the largest number of berries is 300. So, That is point F. So point F, we have zero rabbits. So since rabbits are plotted on the X axis and berries on the Y axis here, point F is showing we have zero rabbits and then 300 berries. And then A, at point A, we have five rabbits, zero berries. So that's five rabbits, zero berries. And then all of these are just the points in between. And if we're looking at how the slope changes as we move across the x-axis, we can see that over here the slope tends to be relatively flat. And then as we're moving along to the right, the slope is getting steeper and steeper. So this is the increasing opportunity costs. So. Let's see what some of the interesting takeaways are from this graph. So just some things to note for glancing at these numbers. One thing we might notice is that. There is a trade off between these two things. So, for example, if we want to be getting more berries going down this way, we get fewer rabbits as a result. or we can say if we want more rabbits going up this way, we get fewer berries. So there's no way that we could get more rabbits and more berries. And that makes sense because we have a fixed amount of time. So if we want more berries, we spend more time gathering berries. That gives us less time to hunt rabbits, which means that we're going to result in getting fewer rabbits. So there's a tradeoff between these two things. Another interesting takeaway is that if you look at how the number of berries is changing. So in the first hour, we gather 100 berries. In the second hour, we're really only getting 80 berries because The difference between 180 and 100 is 80. So it's like saying in the first hour we gather 100 berries. In the second hour we're only getting 80 additional berries because this is total number in two hours. So with each additional hour, the number of berries that we're getting is decreasing. In the first hour we are able to get 100. In the second hour we get 80. In the third hour, so 240 minus 180 is 60. In the fourth hour, we're gathering 40 berries. And in the fifth hour, we're only able to gather 20 berries. So, This is reflective of reality. If you've ever gone apple picking or picking berries, you might notice that initially when you start off, you're able to get a lot of berries or fruit. in a short amount of time. And then as you're already picking off these berries that are easy to reach in the bushes, what's left are the ones that are maybe hidden inside or something, right? So it takes more time to gather berries. So, for example, I've noticed that this is true, like when I pick lemons from my backyard as well. So I have this tree and it's quite a large lemon tree. And so initially when I am taking the lemons off of the tree, I'm able to just stand on my two feet and reach for the lemons that are easy to pick. And then once all of those are taken off, the only lemons that are left are the ones that are higher up on the tree. So I can't just stand and reach for them. I have to use this fruit harvesting tool, which is just like this pole that has a basket at the end with like little picks. And it's, you know, in order to grab each additional lemon, you have to position the pole properly. And it's not really the easiest thing to use. So it's kind of like the same as this example where initially I'm able to gather many, many lemons at once. And then the more time that I've spent. the lemons that are remaining are the ones that are harder to reach. And so it takes more and more time to pick each additional lemon. And because it takes more time, there's a higher opportunity cost. So that's what these increasing slopes are reflecting. So a higher slope in absolute value means that there is a greater opportunity cost. And it's due to the additional time that it takes. in order to complete the activity. OK, so we kind of just covered some of the points on this slide. So. All right, so let's look at this example. So now we have a straight line PPF. So here we are producing two different things, books and shirts. And remember, a straight line PPF indicates that the opportunity costs are constant because a line only has one slope. So one slope means opportunity costs are fixed. So if we look at this table over here, saying that in combination A, we're able to produce four books and zero shirts. So A, we get four books and zero shirts. In combination B, we get three books and one shirt. Oops. So and then in combination C, we have two books and two shirts. Combination D, one book and three shirts. And then combination E, we have zero books and four shirts. And so the reason that the trade-offs are the same is because the slope is fixed. So if we pick any two points, let's say we pick A and B. If we want to move from point A to point B, it's saying that we are giving up one book and instead getting one additional shirt. And it's the same if we go from C to D as well. So from C to D, we are giving up one book and getting one shirt. Or we can say that if we go the other way, so going from like E to D, for example, it's the same idea. We're giving up one shirt in order to get one book. So the tradeoff is always one to one. And it doesn't necessarily have to be a one to one ratio. So the slopes are fixed or it's a straight line PPF as long as the ratio is always fixed. So it could be two shirts for one book as well. So let's say this was eight and six. So we're giving up two for one. So as long as the ratio is always the same, we're going to see a linear PPF. Okay, so if we want to consider in reality, let's say we want to draw the PPF for any two goods. So for most things, would we observe that the PPF is linear, indicating constant opportunity costs, or would we expect most things to have a bowed outwards PPF, indicating increasing opportunity cost? So it turns out for most goods, the opportunity costs generally increase as more of a good is produced. So most PPFs in the real world are bowed outwards. And this gives the definition of the law of increasing opportunity costs, which states that as more of a good is produced, the opportunity cost of producing that good increases. And the reason that most things generally have increasing opportunity costs is because people have varying abilities. So as human beings, we don't all have the same skills. Some people are more skilled in certain things than others are. So because we all have varying abilities, anytime humans are used in this production process, you're going to see that the opportunity costs are increasing. So. We talked about how this applied to picking lemons, for example, right? So initially, when you start off picking lemons, you're able to get the ones that are easiest to reach in the tree. So in the shortest, in a short amount of time, you're able to pick many, many lemons. And then as those ones are taken off, the only ones that are left are the ones higher up on the tree. And it takes more and more additional time to pick these lemons. And this is applicable to... various other occupations as well. So suppose we have this construction company. When the company initially starts hiring workers, they're going to be recruiting the very, very best workers. So these workers, on average, are able to build a home in the shortest amount of time. So when the company first starts hiring, let's say they hire people who on average can build a home in only 30 days. Now, if this company is going to be expanding and getting larger, let's say they need to build more and more homes. Well, then they're going to need more and more employees as well. So they're going to need to hire more workers. So Because they already hired the very best workers in the first round of hiring, in the second round of hiring, they'll be recruiting people who perhaps are good workers, but on average, they're going to take a little bit longer to build a home. So this group is a little bit less skilled than the first group that was hired. So in the second round of hiring, let's say that on average, these workers take 40 days to build a home, whereas the first group only took 30 days to build a home. So this shows that as we build more and more homes, it takes longer and longer to complete each additional one. So because it's taking more time, the opportunity cost of producing each additional home increases. So this is what we mean by the law of increasing opportunity costs. So as we produce more and more of a certain good, the opportunity costs of producing that good increase. Okay, so the production possibilities frontier framework is relatively simple in illustration. It's showing, you know, given two goods. how what the trade-offs are between producing these and how we can show all of the different possible points of output. So even though it's relatively simple and illustration, it highlights a lot of very important economic concepts. So in particular, the PPF illustrates the concept of scarcity, which we talked about in Chapter one. And then choice, opportunity cost, productive efficiency, and so on. So let's take a closer look at each of these seven economic concepts. Okay, so first the PPF illustrates this concept of scarcity. So scarcity can be shown if we look at the attainable region versus the unattainable region. So this production possibilities frontier curve, this purple line, separates these two regions. So what we mean is, so anything we know along this purple line, so this is the production possibilities frontier, the PPF, we know anything along this line is possible. So with like the hunter-gatherer example, for example, so here, we know each of these points as possible. It's just based on how we're dividing up the time, we can get to any of these points. So any point along the frontier is possible. Okay. Now, If these points are possible, anything on the interior is also possible to produce that. These are all attainable. What that means is, for example, if we could produce 35,000 TVs at C and 35,000 cars, we could also definitely produce at F, where we have the same number of cars but fewer TVs. If we're able to produce at C, we can obviously produce at F too. It's easier to produce at F because it's a smaller number. So anything in this attainable region are points that are possible of production. However, points that are beyond this PPF, so anything on the exterior over here, these are all points that are unattainable. So currently, with the resources that we have and the state of technology that we have, we're unable to produce at these regions. Okay. Second, we have this idea of choice. So even though we could produce at A or B or C or D or E or anything along this line, we can't be producing at A and B, for example, because at A, we're producing 5,000 cars and 55,000 TVs. And then at B, we're producing 15,000 cars and 50,000 TVs. So if we were to combine both of these, it's like saying we would be producing 105,000 TV sets, which would be like way up here. So we know that that's way outside of our PPF. So choice indicates that even though we could be at any of these points, we can't be at multiple ones simultaneously. We pick one or the other. And this again relates to scarcity because it's showing that we don't have the resources to be able to produce 105,000 TVs. So that's because of the limited resources. Okay, the third concept is opportunity cost. And opportunity cost means trade-offs. So we can see opportunity cost if we move between any two points. So let's say we go from A to B. We can see that going from A to B, we're able to get more cars. From 5,000 cars, we're able to now get 15,000 cars. but going from A to B, we give up some TVs, right? So we give up 5,000 TV sets in order to get these 10,000 cars. We cannot get more of both. So opportunity cost shows that in order to get more of one good, we must give up some of the other. So there's a trade-off between these two things. The fourth concept is productive efficiency, and productive efficiency is shown by any point on this PPF, so on the frontier itself. So what that means is any point that's on this purple line or the PPF is possible to produce at, and it's also efficient production. So if we're using the resources that we have in our economies optimally, we're able to produce at these points. Thank you. Whereas if we are on the interior, so like something like a point like F, this is productive inefficient. Okay, so the reason that a point on the interior is productive inefficient, so I guess I can just go back to this point here. So at F, the reason that F is inefficient, whereas C, D, and E are efficient points of production, is because at F, it's showing we're not using our resources fully. If we were, if we were using our resources optimally, instead of being at F, we could go up this way and be at C, where we have the same number of cars at F and C. But at C, we're also able to get more TVs than we do at F. So F is inefficient because if we were using our resources efficiently, we should be able to get more TV sets going up this way. Or going across this way, we should be able to get more cars. Or we could actually get more cars and TVs if we go from F to D. So the reason F is inefficient is because we're able to either get more TV sets, more cars, or we can actually get more of both. So we can actually get more TV Whereas the points on this frontier, these are efficient points of production because it is impossible to get more of both goods once we are already along this line. So that's a really, really important takeaway. So the difference between efficiency and inefficiency is because at these efficient points, in order to get more of one good, we have to give up some of the other. Whereas if we're at any of these interior points that are inefficient, we could get more of both goods without having to sacrifice anything. And that's because at F, what it's saying is that there's some unemployment. So that's the fifth concept here. So we have some unemployed resources at F, which is why we're not producing to the best of our capabilities. If we were to relate this to the hunter-gatherer example, a reason we would be on the interior over here, so closer to the origin, or in the interior of this PPF. So in the hunter-gatherer example, a point on the interior means that even though we have five hours in the day to work, we're not using all five hours. So one reason we might be on the interior is because we're only working three hours in the day and not maximizing the five hours. Okay. So again, just to reiterate, any point on the exterior over here is unattainable. And one way that these points would later become attainable is if we have more resources or if we increase technology. Okay. So in this slide, we're taking a look at economic growth and we'll talk more about economic growth when we get to Chapter 17. But here, just seeing how economic growth relates to the PPF framework here. So initially we have this first PPF and it's showing that the entire thing is shifting outwards. So the PPF shifts outwards like this. If we have an increase in both goods. So whatever you have on the X axis and whatever you have on the Y axis, if we're able to produce more of both. So we have. we're able to produce more civilian goods and more military goods, then this point will shift outwards, this one will shift outwards, and so it gives this entirely new PPF. So when we're able to increase the production of both goods, good X and good Y, the entire PPF will shift outwards. Whereas if you are, if we are only able to produce more of one good, but the production of the other stays the same, it does not increase, then the PPF just pivots. So it's not that the entire thing shifts, but rather it just pivots outwards. And that's because the number of goods over here has not changed. Okay, so the reason that we care about the production possibilities frontier and why it's really an important illustration is because it shows that specialization and trade can help us to get to these points that were previously unattainable. So we said here Z was unattainable. So the PPF. These points, it shows how much the economy can produce given two things, given the resources that we have and given the technology that we have. So a point like Z, this would, this is now unattainable, but it could become attainable if we had more resources or better technology. And there's actually a third factor that can also help us to reach these points, and that is trade. So if we specialize based on what's called comparative advantage, so if we specialize in what we are relatively better in producing and then trade with one another, that also allows us to reach these points that are beyond the frontier. So we'll illustrate this concept using a model with two individuals, Brian and Elizabeth. Okay. So suppose Brian and Elizabeth both make bread and they grow apples. So these are three different combinations of output that Elizabeth can produce. So she could either produce 20 loaves of bread and zero apples. So that's point A. Or she can produce 10 loaves of bread and 10 apples, which is point B. Or she can produce no bread at all and 20 apples, grow 20 apples. So these are three different possible combinations of output that Elizabeth can produce. And for simplicity, let's say that each of these workers are going to be working eight hours in the day. So let's say if. Elizabeth spends all eight hours making bread. She's able to make 20 loaves of bread. And because she's not spending any time growing apples, she gets zero apples. The second point, let's say she's spending four hours on each. So in four hours making bread, she can make 10 loaves of bread. And in four hours growing apples, she can grow 10 apples. And if she were to spend the entire eight hours on growing apples instead, she can grow 20 apples. And because she's not spending any time baking bread, she gets zero loaves of bread. And it's the same idea over here for Brian. So if Brian spends all eight hours in the day making bread, he can make 10 loaves of bread. If he spends four hours on each activity, he can spend, so he can make five loaves of bread in the four hours, and in the four hours of time remaining, he can grow 15 apples. And if he spends all eight hours growing apples, he can grow 30 apples. So these are the points on Brian's PPF. And just note that any point on this PPF is possible. So E, for example. represents all eight hours making bread, G is all eight hours spent growing apples, so F, which is the midpoint, shows four hours on each activity. But a point in between E and F would also be possible. So this would be, so the closer we get to E, the more time we're spending baking bread and the less time growing apples. But for example, let's say Brian were to spend six hours in the day baking bread and then two hours growing apples. So then he would be somewhere along the lines closer to E over here rather than F. So the more time he's spending baking bread, he's just moving along this way. on his PPF. Okay, so here we just have L's possible combinations rewritten. So for simplicity, we're just calling Elizabeth L. So L's possible combinations. So these are the same as what we saw over here. And this slide introduces the concept of absolute advantage. Absolute advantage answers the question, given the same number of inputs, who is able to produce more? So the number of inputs are the resources that each producer has. So in this example, we said Elle and Brian each work eight hours in the day. So the amount of time they work is their input. That's their resource. So given that each of these producers are working eight hours in the day, who produces more? So if we look for apples. Okay, so if we use the PPFs to see who has an absolute advantage in producing bread, we can see that if Elle is only producing bread, she's able to make 20 loaves of bread. Whereas if Brian is only producing bread, he can only make 10 loaves. So since Elle is able to produce more bread than Brian, she has the absolute advantage in producing bread. Similarly, in order to determine which producer has the absolute advantage in growing apples, we can see that if Elle is only growing apples, she's able to grow 20 apples, whereas Brian is able to grow 30 apples. So because he's able to grow more apples, he has the absolute advantage in producing apples. Okay, next we want to determine who has a comparative advantage in producing bread rather than the absolute advantage. We're looking at comparative advantage and who has a comparative advantage in growing apples. So in order to find comparative advantage, the first thing we need to do is determine opportunity costs. So here when we're looking at Elle's opportunity costs, this Most simple way to find opportunity costs is by using the x and y intercepts to find the slope. Right. So because opportunity cost is just the slope. So for L over here. Here, this is our y-intercept. This is the x-intercept. So remember that opportunity cost is the slope between any two points. And we could pick A and B or A and C. So it doesn't matter which two points you pick, but it's just the slope between any two points. And here it's the same because it's linear. So, opportunity cost is given by the slope. And we know that slope is rise over run. So if we want to find the slope between point A and point C, we need to find the rise, which is this vertical distance, and the run, which is this horizontal distance. So the slope between these two points, rise over run, so rise is 20. over the run, which is also 20. So 20 divided by 20 is 1, which is saying that for each apple that Elle wants to grow, she's giving up one loaf of bread. So we found, so this was the two intercepts, the X and the Y intercept, and then dividing this by one or dividing the 20 apples by 20 to get a one unit here means that if we're dividing the left hand side by 20, we also need to divide the right hand side by 20. So 20 divided by 20 is one, 20 divided by 20 is also one. So that's how we get this ratio. Okay, and again, we could have also picked the points A and B. So if we want to find the slope between A and B, again, rise over run. So the rise, this vertical distance, is now 10 over the run, this horizontal distance, which is also 10. So 10 over 10 is 1. So again, it's the same slope that we found before. And we want to similarly find the opportunity costs for Brian. So here, if we're using the points E and G, slope between these two points, so the rise is 10 over the run, which is 30. So 10 over 30 is one third. And again, just keep in mind that when we're talking about opportunity costs, we're finding the slope, but just the absolute value of slope, because we know that this is negative. And in fact, the negative slope is showing that we have to give up one in order to get the other. So technically, we could say that this has a slope of negative one, which is saying for each apple that Elle wants to grow, she's giving up one bread. But we're just looking at absolute value of slope. So here, the distance 10 over 30, which is one third. So that's saying that for each loaf of bread that Brian wants to make, he is giving up three apples, right? So one over three or 10 over 30, which is one-third. Okay. So opportunity cost, we found 10 loaves of bread, 30. So here we're dividing 30. by 30 in order to get a one. So 30 divided by 30 is what gave us the one. And if we're dividing this left hand side by 30, we also need to divide the right hand side by 30. So 10 over 30 is one third. Okay, so now that we found the opportunity costs, which we use the x and the y intercept here to get these ratios. We can compare the opportunity costs for one producer to the other in order to determine who has a comparative advantage in producing each good. So when we want to find comparative advantage for each good, we want to know who has a lower opportunity cost in producing that good. So whoever has a lower opportunity cost is sacrificing less, meaning they're giving up fewer amounts to produce. So they should be the one to produce. So if we want to know who has a comparative advantage in producing apples. we can look at these ratios here. So for L, in order to grow one apple, L gives up one loaf of bread. Whereas Brian, in order to grow one apple, he gives up a third of a loaf of bread. So because he's giving up less, he's only giving up one third rather than one whole, he should be the one to grow apples. Another way of thinking about this is if Elle wasn't using the time to grow this apple, she could make one loaf of bread. Whereas Brian, if he wasn't using the time to grow one apple, he could be making a third of a loaf of bread. So because Elle is able to make more bread in that time than Brian, she should be the one to bake the bread and Brian should be the one to grow apples. So that's just another way to think about it. And then similarly over here, if we want to know who has a comparative advantage in producing bread, we look to see, okay, if Ella wants to produce one loaf of bread, how many apples is she giving up? So if Ella wants to produce one loaf of bread, she's giving up one apple. If Brian wants to bake one loaf of bread, he gives up three apples. So because Elle is giving up fewer apples to bake bread, she should be the one to bake bread. So comparative advantage is based on whoever is giving up less or sacrificing less in order to produce. So whoever is giving up less in order to produce should be the one to produce. Now, let's think about why this comparative advantage is based on the lower opportunity cost rather than higher opportunity cost. So in this previous slide, we said, OK, whoever has a lower opportunity cost in producing each good should be the one to produce. So why is that? Well, one way to think about this is that the opportunity cost is like a production cost. and if there are many sellers and each seller has a different production cost, the seller with the lowest production cost should be the one to produce. So whoever can produce something for the cheapest amount should be the one to produce, given that the end product is the same in quality, right? So we're not saying that they use cheaper quality products and that's why they're able to produce cheaper, but at the end, the result is all the same. The quality of the product is the same. So given that the quality in the end is the same, whoever can produce for the lowest cost should be the one to produce. So, for example, suppose you want to buy a TV and there are two sellers that are selling the same exact TV. There's Anna's Electronics and Bob's TVs. Anna's Electronics operates from her garage. So because of that, she has a low cost of production. She doesn't have to pay for storage fees or operation fees and things like that. Whereas Bob's TVs has storefronts located throughout the country. So because of this, there are high costs of storage and higher costs of production for Bob's TVs than for Anna's Electronics. So if you're trying to decide who to buy this TV from, You would probably want to buy it from Anna's Electronics. So because she can produce the TV at a lower cost, she doesn't have to pay for storage fees and things like that. So since she can produce at a lower cost, she can also likely give you a better price when she turns it around to sell it to you. So because she can produce at a lower cost, she can also sell to you at a lower price. So this is why you would probably prefer to buy from Anna's Electronics. So it's the same idea when we look at opportunity cost. Whoever can produce for a lower opportunity cost should be the one to produce. Okay, and in this example, note that for absolute advantage, so when we looked at absolute advantage for apples, it was Brian that had an absolute advantage in producing apples. And L had an absolute advantage in producing bread. So when we look at comparative advantage, it's the same. Brian had the absolute and comparative advantage in producing apples and L has a comparative and absolute advantage in producing bread. So whenever you have this absolute advantage between the two producers, one producer is better at one and the other producer is better at the other, comparative advantage will follow the same. way. Whereas in some of the other homework examples, you might see what happens when one producer has an absolute advantage in both. So So it is possible for one producer to have an absolute advantage in both. But when it comes to comparative advantage, you should never see that one producer has a comparative advantage in both because of the way that these ratios work out. So when we're comparing absolute advantage, we're seeing, OK, who is producing more, one producer versus the other. So direct comparison, whereas with opportunity costs and comparative advantage. we're not just glancing to see who produces more. We're looking, okay, for Elle, let's compare how many apples she can make relative to bread. So we're comparing her own production of the two goods before comparing her production to Brian. And as a result of that, when it comes to comparative advantage, you should see that this is always split between two producers. So it is mathematically impossible for one producer to have a comparative advantage in both. And that's because we're not just comparing one producer to the other. Before comparing one to the other, we're comparing their own production of the two goods. And because of that, we should see that this is always split. So if you ever find that one producer has a comparative advantage in both products, you should know that there's probably a mathematical error somewhere that led to that. Okay, so now let's look at specialization and trade. So we found that Al has a comparative advantage in making bread, and Brian has a comparative advantage in growing apples. So specialization is going to be based on comparative advantage, not absolute advantage, because again, with comparative advantage, this is split between two producers. So it allows us to see who should specialize in what. So because Al has a comparative advantage in making bread, she's going to specialize in making bread and she only makes bread. So in the eight hours she spends making bread, she can make 20 loaves of bread. And since Brian has a comparative advantage in growing apples, he's going to specialize in growing apples. So in the eight hours, he's able to grow 30 apples. Now, Elle doesn't want to just eat bread. Brian doesn't want to just eat apples. So they agree to trade eight loaves of bread for 12 apples. So let's see where they end up before and after trade. So... Starting off, we saw this. So before trade, Elle was at this point. So we know she could have been at A and B and C or anywhere in between. But again, she doesn't just want bread or just want apples. She wants some of both. So she chooses point B. So initially, before specialization and trade, she is able to produce and consume 10 loaves of bread and 10 apples. And similarly, Brian, before trade, is able to produce and consume five loaves of bread and 15 apples. So that's where they are before trade. Now after trade, Al specializes in making bread. So she makes 20 loaves and she doesn't make any apples. But she gives away eight of the 20 loaves of bread. And in exchange, she gets 12 apples from Brian. So what she ends up with, so she makes 20, gives away eight. So she has 12 loaves of bread left. And with trade, she gets 12 apples. So this is where she ends up after trade. And we can see that she is better off with trade because prior, so before trade, she only had 10 of each. Now with specialization and trade with Brian, she gets 12 of each. So the gains from trade, she gets two more apples and two more loaves of bread with trade. So she is better off. And if we look at Brian's... consumption after trade. So after trade, he only specializes in growing apples. So he makes 30 apples in the eight hours and he doesn't make any bread, but he gives away 12 apples from the 30 that he makes because that's what they agreed on earlier. So he grows 30, gives away 12. He's left with 18 apples. And he doesn't make any bread, but he gets eight loaves from Elle. So he ends up with 18 apples and eight loaves of bread. So if we compare this to what he had before trade, we can see that he gets three additional apples and three additional loaves of bread. So across the board, we can see that Elle and Brian are both better off with trade. And this is really important because remember that before trade, if Elle wanted to get more apples, for example, she would get less bread because she'd have to dedicate more time to growing apples, which would leave her with less time to make bread. So she could get more apples, but it would be at the expense of some bread. Or if she wanted more bread, she'd have to give up some apples. So she couldn't get more of both. But we can see that with trade, she can get more of both. So this is why trade is really, really beneficial and it makes both parties better off. Okay, and if we're plotting their production and consumption before and after trade in this table over here, we can see that this is where L was before trade, the 10 loaves of bread, 10 apples. And then with trade, she's able to get 12 loaves of bread and 12 apples. So before trade, D, this point over here, is beyond this PPF. So before trade, D would have been unattainable. But now with specialization and trade, this is where she ends up. So she is able to reach these points. Similarly for Brian, before he was at F and H would have been unattainable. But with specialization and trade, it allows him to be able to produce and consume at this level over here. So we can see that both Al and Brian are better off with trade. OK, so this example. might be a little uneventful because we know that since Elle was better at baking bread and Brian was better at growing apples, obviously they have incentive to trade with one another. But in some of the other videos and examples you'll see, even if Elle was better at making bread and making apples, she would still have incentive to trade with Brian. So even if she had the absolute advantage in both, so she was better at baking bread and better at growing apples, she would still have incentive to trade with Brian because if she were to just specialize in one, she would be able to expand beyond her initial PPF. So there are some examples that show that. And an analogy to that is, so if we want to relate it to reality, let's say that LeBron James is better at playing basketball and better at mowing lawns than his neighbor. Does that mean he should do both? Or should he specialize in one and let his neighbor do the other? So obviously, if he's so good at basketball, him not playing basketball means he's sacrificing a lot. So because of that, he should only specialize in basketball and let his neighbor mow the lawns, even if he has an absolute advantage in both. So there's some examples that show that. So that's basically it for this chapter. If you have any questions, please feel free to send me an email. Thank you.