trade offs comparative advantage and market system okay we've talked a little bit about trade offs and we introduced scarcity last module remember that's just where we have unlimited wants and a limited number of resources available to meet those wants so how do we make just what's what I think maybe the best decisions about using those scarce resources that's what we're that's the tools that we're gonna develop here in this section because scarcity is going to require trade-offs so when Tesla for example is going to produce sedans and SUVs has a limited amount of workers and a limited number of machines to be able to do that what's going to be the best the optimal allocation between production between SUVs and sedans - we're going to continue on with that example of Tesla a second we're going to use a production possibilities frontier a PPF that's just a curve showing the maximum attainable combinations to products that can be purchased with available resources and current technology so is this a positive or normative tool a PPF remember that distinction a positive shows what is versus a normative which shows what what should be so PPF is just it's a positive assessment what is what can be produced given current technology and available resources ok so here's an example of a PPF Tesla can produce notice we have here sedans or SUVs on this axis and given its current resources that balance of labor and machinery it can produce 80 sedans and if it produces 80 sedans that means there'll be no SUVs produced so anywhere along this line here would be feasible combinations of the two amount of sedans and SUVs so if it makes 60 sedans it could produce 20 SUVs ok points inside the curve would be inefficient that means we could we could produce this amount but this is less than what what we could actually attain using our current resources and technology right so if we we could produce 30 sedans and 10 SUVs yeah sure that's fine but we could also if we were producing thirty we could go all the way out here on the on the efficient line here and we could produce about fifty right so anywhere inside this curve would be inefficient all of our resources aren't being used in production outside the curve on the other hand are not these points are not attainable anything out here we cannot produce given our current technology and available resources okay so here's where the trade-offs come in in order to move say from A to B Tesla faces a trade-off so in order to go from at a we are at eighty sedans and zero SUVs if they want to produce twenty SUVs they're going to have to give up some of the amount of sedans that they were producing so go to go from eighty to eighty and zero to this point sixty and twenty they're having to give up twenty sedans to produce twenty SUVs so in this case it's just a trade off that's one to one right for every sedan sedan they give up they get one additional SUV so let's couch that in a language that we use before opportunity cost remember that is the highest valued alternative that must be given up to engage in activity so those twenty fewer sedans and moving from A to B they lose twenty sedans that is the opportunity cost of producing twenty more SUVs they have to give up twenty sedans to get twenty SUVs okay on that last side we had a linear PPF right it was just a straight line so opportunity costs were constant but opportunity costs aren't necessarily constant in fact typically the way we want the way we want to think about them is that they are increasing so here at first to get 200 automobiles to go from zero to 200 we only have to give up 50 tanks now this is not the Tesla example we have tanks and automobiles so to make 200 automobiles we have to give up 50 tanks over here however to go from B to C now to get 200 additional automobiles we have to give up 150 tanks now we're giving up more tanks to get the same amount of automobiles why might be why might this be the case this makes good sense some resources are going to be better suited to producing tanks and they would be for automobiles so the first resources we give up here they're actually probably better suited making automobiles anyway but by the time we get over here moving from B to C and certainly if we move from C to right here we're giving up resources that are best better suited to producing tanks and they would be for automobiles and we're forcing them to make automobiles instead so this is a general principle here that you want to be familiar with increasing marginal opportunity costs the more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity so by the time we get over here and we're giving up tanks for automobiles it becomes more and more costly we have to give up more and more tanks to get additional automobiles ok economic growth and the PPF so remember I said before inside here were unattainable outside was I mean sorry inside here was inefficient outside here was unattainable right given a level of technology and current resources but if we have economic growth that extends the PPF outward so now we're going from A to B so now things that we can produce things before that we're unattainable now become attainable because of economic growth so economic growth is just the economy is increasing there's an increased production of goods and services so shifts outward would be economic growth shift outward of the PPF okay we can also show technological change in one industry right changing the shape of the PPF here there's no change in the technology for tanks that so that still stays at 400 but now say we have some new technological improvement in the construction of in the manufacturing of automobiles so now we can produce more automobiles overall shifting kind of twisting this P outward shifting just this one part here not a shift of the whole curve right but a shift because there's some advance in automobile manufacturing so now many of the previously unattainable combinations are available right anything outside this initial one was unattainable before but now we can reach lots of them over here that we couldn't reach before okay so imagine that you have a limited amount of time to study for two exams in economics and accounting what would the PPF for this look like you think it would be a straight line with constant opportunity costs or a bowed outward curve like what we saw with tanks and and automobiles it's going to be bowed outward because the first hour spent studying economics is much more valuable than the last hour right it's a it's a case of increasing opportunity costs which we associate with that bowed outward curve and the more resources devote already devoted to an activity the smaller gain there is from devoting additional resources to that activity so by the time you studied 10 hours for economics right adding another hour isn't going to be as much it would be much more valuable spending some time studying accounting instead all right comparative advantage this is going to be a key concept you're going to spend some time studying the examples in the book and make sure you get a handle on how this works okay so we got two people here you and your neighbor and you're picking fruit cherries and apples now if you spend all your time picking cherries you can pick 20 pounds if you spend all your time picking apples you can also pick 20 pounds so here's your PPF anything on here is efficient and attainable anything in here is inefficient anything out here is unattainable so you can pick any combination on this line is going to be efficient your neighbor on the other hand is just a better fruit picker for whatever reason if she spends all her time picking apples she can pick 30 pounds if she spends all the time picking cherries you can pick 60 pounds and anything on that line is attainable and efficient okay now your neighbor is just a better picker of fruit than you are so what's going to happen if you decide to specialize and trade with your neighbor and trade is just buying and selling right apples and cherries that voluntary exchange idea that we talked about before so could your neighbor benefit from trade we saw that she's just better at picking both apples and cherries right yes you both can benefit from trade by specializing and what you are relatively good at relatively good at so your neighbor has an absolute advantage but you both have relative advantage a comparative advantage okay so here we go here's your PPF and say you choose somewhere in the middle that's your consumption without trade all right and here is your neighbors consumption before trade so we're on that efficient line we're spending all our time balancing between picking cherries and apples both you and your neighbor are picking both of those okay if we specialize though now you're gonna pick right here instead you're only gonna pick apples spending all your time picking apples and your neighbor is gonna spend all of her time picking cherries okay so now she's picking 60 pounds of cherries and you're picking 20 pounds of apples if you trade some of your apples now ten pounds of your apples for fifteen pounds of your neighbor's cherries you're gonna be able to consume ten pounds of apples and fifteen pounds of cherries so now you are out here this point was unattainable before when it was just you on your own PPF right now you're reaching this out here your consumption now with trade compared to before and your neighbor is also better off this point D was unattainable before so your neighbors getting more of both apples and cherries just like you're getting more of both apples and cherries okay now this this specific don't let this specific number here this trade off throw you off there's a range here of what would be mutually beneficial trades and these are just picked this is just somewhere within that range so the big point is though that with specialization consumption after trade is going to be higher for both you and your neighbor right these numbers 8 versus 10 12 versus 15 9 versus 10 42 versus 15 there is mutually beneficial exchange that can happen after specialization and so everyone is better off these gains aren't divided evenly that depends on the terms of trade how exactly you decide to what the terms are agreed on between you and your neighbor like I said don't don't worry so much about that but this is the really cool thing about it even though your neighbor had an absolute advantage in picking cherries and apples both of you are better off from specializing in trade okay so yeah here's this here's this idea your neighbor has that absolute advantage so she can pick more cherries and more apples right but you have a comparative advantage in picking apples okay absolute advantage is pretty straightforward that is just you're able to produce more you pick more cherries more apples right using the same amount of resources in this case the same amount of time the comparative advantage though this is going to be then the new thing a individual firm or country can produce a good or service at a lower opportunity cost than competitors okay so take a look at this so this is now the opportunity cost of picking one pound of apples remember you you were 20 and 20 so if you produce if you pick apples you're giving up a pound of cherries if you pick cherries you're giving up a pound of apples your neighbor however was 30 and 60 all right yeah 30 and 60 30 pounds of apples versus 60 pounds of cherries so that ratio is a 1 or is a 2 or 1/2 ratio right so when your neighbor picks 2 pounds so when your neighbor picks one pound of apples she has to give up 2 pounds of cherries because of that 30 to 60 ratio similarly when she your neighbor picks one pound of cherries she has to give up a half a pound of apples so this is the the key thing that you want to see here the basis for trade is comparative advantage not absolute advantage comparative advantage is based on the lowest opportunity cost so you have a lower opportunity cost of picking apples right one you only have to give up one pound of cherries your neighbor has to give up to your neighbor has to give up half a pound of apples you would have to give a whole pound of apples so you are going to specialize in picking apples up here because you have the lowest opportunity cost and your neighbor specializes in picking cherries because she has the lowest opportunity cost so comparative advantage is the basis for trade okay here's another example you can look through it it's like the same thing we just did with cherries and apples