What I want to do in this video is make sure we understand the difference between comparative advantage and absolute advantage. What we saw in the last video is that Patty had a comparative advantage in plates relative to Charlie because her opportunity cost of producing one plate was lower than Charlie's opportunity cost of producing a plate. Hers was one-third of a cup, his was three cups. So that's why it made sense for her to specialize in plates. Charlie, on the other hand, had had a comparative advantage in cups.
His opportunity cost for producing a cup was only a third of a plate, while Patty's was three plates. So that's why he specialized in cups. Now, we can't confuse this with absolute advantage. Absolute advantage in a given product just means that you produce that, you are more productive at that thing given the same inputs.
And so... if I were to just give you this graph, and you didn't know how many workers Charlie or Patty had, and how many inputs they're using to produce either 30 cups in a day or 30 plates in a day, you actually could not make any statement about absolute advantage. But if we assume that in all of these scenarios they have the same number of inputs, so if we think about plates, if we say, let's say they each have one employee, maybe it's themselves, and given that one input, or the same number of inputs, Patty is able to produce more plates than Charlie, then it is true.
Patty would have an absolute advantage in plates. And if given the same number of inputs, Charlie is able to produce more cups than Patty, then he would have an absolute advantage in cups. But it is not because of that absolute advantage that he is specializing it.
In fact, we don't even know what their inputs were. It might be that he doesn't have an absolute advantage. Maybe Charlie needs 100 people to produce his 30 cups, while Patty can produce 10 cups with one person.
So in that case, actually, Patty would have an absolute advantage, but it just wouldn't be obvious from this right over here. But to make everything clear, I want to do a scenario where, let's say Charlie improved his productivity in some way, and he actually has the absolute advantage in both products and still show that as long as they have different comparative advantages, that it still makes sense for them to specialize. So let's do that.
Let's do another scenario. So Charlie has improved dramatically. So let's draw our little graph here. So that's our cups axis, and this is still our plates axis. Cups and plates.
And let me put some more markers here. 10, 20, 30, and 40. And 10, 20, 30, and 40. And let's still put Patty. Let's assume Patty hasn't changed.
So this is her PPF. So that is Patty's PPF, just like that. But let's say that Charlie has improved dramatically.
And so Charlie's PPF looks like this. So this is Charlie's PPF now looks like this. So in a given day, he can produce, and let's just assume that they're using the same number of inputs. So using the same number of inputs in a given day, he can produce 40 cups when Patty can only produce 10. So he has the absolute advantage in cups.
Or in the same given day, using the same inputs, he could produce 40 plates while Patty can only produce 30. So now Charlie all of a sudden has an absolute advantage in both products. But we'll see it still makes sense for them to specialize because they have different comparative advantages. They have different opportunity costs. So let's figure this out. So we have all the same numbers for Patty.
Actually, let me copy and paste Patty's numbers right over here. Actually, we have access to her numbers right over here, so I don't even have to copy and paste it. But let's think of Charlie's new numbers now. So this is the PPF for Charlie.
So this is our new PPF for Charlie. And maybe he did some investment or R&D to get him. this new awesome productive PPF.
So he's expanded his PPF. So what is his opportunity cost? So say he's sitting here. What is his opportunity cost of producing?
So he's producing 40 cups. What would be his opportunity cost of producing 40 plates? Well, to produce those 40 plates, he would have to give up those 40 cups. So his opportunity cost of 40 plates is equal to 40 cups. Or you divide both sides by 40, his opportunity cost for one plate is equal to one cup.
And this makes math very easy, his opportunity cost for one cup is equal to one plate. Now given this new reality, so we've already established Charlie has an absolute advantage in both. Using the same inputs he can do more of either of them.
And remember, when you're talking about absolute advantage you have to think about the amount of input you use, who's more... productive in that way. But let's think about comparative advantage.
If we think about plates, who has a lower opportunity cost for producing a plate? Patty hasn't changed. Her opportunity cost for producing a plate is 1 third of a cup. Charlie's opportunity cost for producing a plate has improved, but it's still worse than Patty's.
He has to spend 1 cup to make a plate. She only has to give up 1 third of a cup to make a plate. So Patty still has a comparative advantage in plates. If we look at the comparative advantage or if we look at the opportunity cost in cups, the opportunity cost for Charlie to make one cup is one plate.
It's actually a little bit worse than it was before, but as we'll see, it ends up being a good thing. He's just overall more productive. But his opportunity cost for one cup, he's giving up one plate now when before he was producing one third of a plate. That's because in the other scenario, he was kind of more He was more one-sided, I guess is one way to say it.
But his opportunity cost for producing a cup is still cheaper than Patty's. Her cost of producing a cup is three plates, her opportunity cost, while his is only one plate. So he still has the comparative advantage in cups. So Charlie should still specialize in cups.
Patty should still specialize in plates. And to show that they can still get an outcome that is beyond even Charlie's production possibilities frontier, let's think about how they could trade. So Charlie is going to specialize in cups. He's going to sit right over there producing 40 cups a day. And Patty is going to specialize.
She is going to specialize in plates. And she's going to sit right there and produce. Let me do this a different color. I don't want to use his color.
And she's going to sit right over there and produce 30 plates a day. So how could they trade for mutual benefit? Well, any trade that is better than their, assuming that they don't want to have only plates or they don't only want to have cups, any trade that is cheaper than their opportunity cost will be a good one. So for example, Patty's sitting here producing only plates.
Her opportunity cost for a cup is three plates. Her opportunity cost for a cup is three plates. So she would be willing to trade anything less than three plates for a cup, assuming that she wants it. Because if she had to make the cups herself, she would have to give up three plates. So let's say that she'd be willing to trade.
So Patty would be willing to trade one cup. Sorry, one plate. Actually, let me write this.
She'd be willing to trade two plates for one cup. She'd be willing to trade that because if she had to make the cups herself, she would have to give up three plates for one cup. So she's willing to trade two plates for one cup. And let's see if Charlie would be willing to trade two plates for one cup.
So he has all of these cups. How many cups does he have to give away for a plate? Well, he has to give away one cup for a plate.
Now he would have to give away one cup for two plates, or he would have to give up half a cup for a plate. Either way, This is better than his opportunity cost of trying to get that incremental plate. So he would be willing to do this too, two plates for one cup.
He'd be willing to do one cup for two plates. And to see how that would improve, he could trade, so he could have 40 right here, 40 cups, or he could trade one of them away. He could trade one of them away. Actually, let's do a scenario where he trades 10 of the cups away.
So he trades 10 of the cups away. So now he only has. 20 cups, but for those 20 cups he traded away, for those 20 cups, actually that's a bad example because Patty won't have enough cups.
So let's say he trades away 10 cups. Let's say he trades away 10 cups. For those 10 cups, so let's get the scenario. So Charlie trades 10 cups for 20 plates.
So now he traded. 10 cups and he gets 20 plates. So now he'll end up at this scenario right over here, which was beyond, it was unattainable when he was working by himself, when he didn't specialize and get these gains from trade. So this is a good scenario for him. He's able to get outcomes that he otherwise would not have been able to get.
He could, depending on how he trades, he could get outcomes on that, well, up to a certain point, because Patty only has 20, Patty only has 30 cups. So he can only get about, he can only... At best, he could take all of Patty's cups. So he could get something along that line over there. But if we look at the same scenario, Patty traded 20 plates for 10 cups.
Where does that put her? So she traded 20 plates. So she's down to 10 plates. But she got 10 cups. So that put her right over here.
Once again, beyond her production possibilities frontier. So this would look like a pretty good situation for Patty as well.