hey it's dr assatar bayer and in this lecture we're going to be talking about resources technology and how a economy or society goes about maximizing its economic output or the wealth that it produces okay so maximum output all right resources technology maximum output this is called other things sometimes this is called productive efficiency or simply efficiency you know the maximization of income or of gdp there's different terms that are used to describe the same thing all right but but in terms of this argument right this goes back to adam smith classic work here wealth of nations and this is really an argument about how does a society produce the utmost amount of wealth that it's capable of producing right and this argument that smith makes is taken and developed by others by ricardo by mill by marshall by many others working in the neoclassical tradition and this is where they collectively end up okay so now remember neoclassical economics microeconomics is a highly mathematical uh theory the language of it is mathematical even though smith did not use that language right he wrote sentences rather than using equations or graphs of however the later that argument has been formalized and so in order to understand it we have to you know do a couple of terms okay so the first thing we need to talk about is resources all right also known as inputs or sometimes called factors of production right so following adam smith typically economists have divided this into three different uh resources all right so and these are land labor and capital right land labor and capital um we're just going to just for simplicity uh we're not going to talk about land we're just going to talk about labor and capital all right so those will be our our two resources and we're going to use capital l to stand for labor and capital k to stand for capital all right so let's just define these things okay what do we mean by by l we mean the number of hours of labor right now if we're talking about this as a resource in society then we mean okay what's the total number of hours of labor that are actually available right and obviously that depends on the population and so forth how many uh the members of the population are capable of working how many hours are they capable of working how long is the day et cetera et cetera right so let's just say that we have this number and it's it's represented by l okay so now capital k we're going to think of that as being the number of units of physical capital and again if we're talking about the entire society we mean on how much total physical capital is available okay so now physical capital what does that mean right well this means things which are used to produce other things right so you see used to produce right and and typically what we when we talk about that right which is what he's used to produce we mean we mean things like tools and equipment machinery etc all right so productive capital or physical capital now you might be wondering what are the actual units right all i said is the number of units this is actually an issue in neoclassical economics what are the units of capital there are no natural units of capital that's kind of the problem right labor it's a little bit different because every form of labor that we can think of you know whether you're digging a hole or you're you know repairing a computer whatever whatever the form of labor is right there's many of different concrete forms of labor all of these take place in time right so a time unit like ours is a natural unit to use for labor right but that's not exactly true with capital right there is no there's nothing that we can point to this is oh this is the common elements that all forms of capital share right um there is no um you know we're not living in a lego world or something like that right where where everything is built out of lego bricks or something no you know there there there is no natural unit of capital so we're going to return to that point later on i just just remember that for now okay so labor and capital these are our resources uh like i said we're going to abstract from land we won't use that in the analysis we'll just assume that land is you know included in this okay so these are our resources now the next thing we need to describe is what is the relationship between these inputs in society okay so resources or inputs or factors of production what's the relationship between that okay the inputs and the amount of output that we're able to get from that right so what do we know my output we mean my output is the finished goods all right finished goods so let's imagine that a society let's let's kind of simplify things right and imagine that society produces okay so say society produces two of finished goods right two kinds of goods now i know this is pretty unrealistic right it's pretty stylized this we do this just to make it easier for ourselves uh the the analysis doesn't really require it it's just a simplification okay so two goods all right and we will look at the the quantity of these two goods like so okay let's call them good one and good two okay so these two quantities q1 stands for the quantity of good one right and this q2 of course quantity of good two all right so here's our question right what's the relationship between right we have these resources in society we've got labor and capital and we're going to take to take them and then produce finished goods what is the relationship right how much output are we able to get given our inputs right now this relationship is very very important right because it has a lot to do with society's productivity right it's a representation of that right the relationship between inputs and outputs i mean you know you could say this is the this is the cornerstone of productivity we can call it technology okay it's technology in the broadest possible sense right it's technology of how to actually produce right we can take our resources and we can get the things that we want and need out of that but at what level right how good are we at producing output given these inputs right and you can see that has a lot to do with well how productive is the labor how productive is the capital right as we get better at producing over time right that we better technology okay so this relationship between input and output is enormously important okay and in neoclassical economics microeconomics refers to this relationship by a mathematical function okay so this is called the production function right the production function represents a mathematical relationship between output and how much labor and capital has gone into it okay so the production function again we're going to depict it in general like this okay we're going to say the output q right remember that represents output that's finished goods is equal to it's a mathematical function of the labor and the capital that went into it okay so the inputs or the resources okay the inputs or the resources represent the independent variables all right these are like our x variables okay the output represents our dependent variable that is like our y variable okay so dependent variable and two independent variables all right now if you're wondering what is the exact nature of this function we're not going to get into it that much in in introductory microeconomics but i'll just give you like a famous example right there's there's a class of production functions which are known as the cop douglas production function and this is a function which has this kind of form right we've we've got q output equals labor let's say the labor is raised to the one-third power times capital raised to the two-thirds power okay so just that this is an example of a mathematical function with these two variables all right so the point of this is right whatever our function is it doesn't have to look like this but you know this is just an example right there's lots of different i mean there's an infinite number really of different functions that can fit into this format right what i've done here is to give you the general form of it right versus this example is a specific form okay so the specific form is going to depend on well whatever it is that we're producing right like we could imagine we in our example we've got two different goods right good one and good two and you know we could imagine that each one of these has a different production function right there's a a function which depends on well how much labor and capital is put into that area right the production of good one right l1 and k1 versus q2 is a function of how much labor and capital is placed into that kind of production right that industry okay so we've got we've we've defined our terms now right our independent variables labor and capital l and k and then we have the production function which represents the relationship between that okay now we're going to make a couple of more assumptions here okay so these are these are assumptions that we'll explore more as we as we go into it all right but here's what we're here's what we're going to assume okay so we'll we'll assume that let's just imagine right that the society is very focused on the same issue that we are right which is what is the maximum amount of output that the society can produce okay so imagine this right imagine that all the resources okay all of our labor and capital for example is goes into just one area of production okay it goes into producing q1 okay so if all of our labor and capital goes into that and everything is being used to its utmost right that is we're using we're producing in the very best way that we know how right so all of our labor and capital go to producing output good one okay we are going to have a maximum amount we're going to have a maximum possible q1 okay that that is that the society is capable of producing right and imagine if we also did this right so this would be one point on our uh that's possible okay so if we were to draw a graph of this okay where we have q1 uh and on the horizontal axis here and q2 on the vertical axis okay uh now just to make this a little bit more specific okay let's imagine that that q1 is like uh berries right berries how do you produce berries well you pick them right so this this is the the number of pounds of berries okay so and then q2 let's say that q2 is meat okay again in pounds all right so oh we've got two goods uh berries and meat okay so they come out of two different kinds of production right so i'm trying to pick an example that is simple example right like you know the first human societies did hunting and gathering right long before the development of agriculture even right hunting and gathering okay so labor that goes towards gathering produces berries labor that goes towards towards meat production hunting right produces meat all right we've got these two different things okay so let's imagine that the maximum number of berries the amount of berries we'll call it point a right here right that the society can produce if everyone uh gathers right everyone you know gathers berries and they use all of their capital uh to gather berries and so forth let's imagine that that that number is 2 000 pounds okay so there we have our point a all right and then let's okay so zero one thousand two thousand okay that's our graph and then we would also have a commensurate amount on this side right i say all right listen we've done we've tried all gathering berries and we know we can produce two thousand now let's all try hunting and see how much meat we can we can produce all right so that is we would have a maximum production of good two that's also possible okay so let's say that this scale is similar here okay imagine that that amount is let's say 1500. okay there's point b there and then imagine that the society has done this again and again in different configurations they've tried out okay well what if we what if we do something in between right these are our two endpoints right a and b but isn't it possible that we maybe we could take some of our labor and allocate it differently use it to to okay everyone is gathering berries right here but let's just take a few people and we'll bring put them over into into meat production right hunting and see what happens okay so let's imagine that we do all that and what we end up with is a graph or a curve that looks like this all right so and what this represents is all of the the possible different combinations that we can produce in the society okay and this this curve has a name it's called the production possibilities frontier all right the production possibilities frontier because that's pretty long we give it a little acronym called the ppf all right production possibilities frontier again what does it represent it represents all the points which are optimal right in the sense of that we have produced a maximum amount of output that we can right given our two things okay our resources in our technology all right our resources and our technology these are the things which drive society's ability to produce okay so very very important cornerstone um you know concepts uh in neoclassical economics resources and technology okay so societies just to restate this okay so society's output is ultimately driven by two factors okay so remember what we mean by output we mean q1 and q2 okay we've just limited ourselves to imagine that the society produces only two goods we could extend the analysis if we wanted to but just this is this is good enough for our purposes just keep it simple right two goods okay that's society's output representing all the different there's different possibilities right because like i said we could be at point a we could be at point b we could be somewhere between right but the main thing is it's driven by the amount of resources okay l and k on the one hand and the technology remember that's represented by the production function okay q equals f parentheses l and k okay so output is a function of labor and capital the exact mathematical function if it looks like this for example right then we have a specific form of it but if we want to just keep it general we'd say okay we know that there's some product there's some function out there that represents this relationship okay we're going to call that the production function all right there's our production possibilities frontier now a couple of things follow from this right so first of all we've done something that's very very important right remember the theory is focused on what does it take to produce the maximum output right so what this represents the ppf represents a picture of that right it's a picture of the maximum output okay so if we discuss this this curve in general there's a couple of things which kind of jump out at us right which we can which we can explore okay so first of all what we notice is this has a negative slope right so negative slope all right negative slope now this has a meaning right this has an economic meaning what that what the meaning of it is like we we must give up something in order to gain okay we must give up something in order to gain now if we consider what that relationship is right so let's imagine that we were at point a right that's our maximum okay 2000 right and we wanted to we said all right we're producing 2 000 remember that this represents the berries over here we have the meat okay so we're producing 2 000 pounds of of berries the only problem with that is berries are you know they're only so so by themselves what would make this really a lot better is if you had it with some meat right so we want to allocate some of our labor and capital we like berries but we would like to have a little bit about we in other words we want to move to another point right so we define these two points right a and b we want to move from point a to point c right now here's the thing right if we do that we're going to have to okay so a to c what has to happen here well we have to take labor and capital out of producing berries right and into producing meat okay so out of out of berry production and we they have to be put them into meat production okay so and this is called the reallocation of resources right we have to instead of taking all of our labor and capital and producing berries we've got to now take some of it and produce meat instead okay and so if we take out some labor and capital right assuming that the the level of technology is unchanged right well then there's going to be a loss right so we are going to have a loss of berries okay and of course on the plus side we'll have a gain of meat right loss of berries gain in meat right now this produces a negative slope right because we're going up on one side but down on the other side right and of course this wouldn't matter right whether we were going from c to a or a to c i mean you know we would if we started at c and we went to a then this one would be going down this side would be going up right but the point is if it has a negative slope what's this expressing is there must always be something that you give up anytime that you gain right and this the concept here is is of a trade-off right so much like a market or any kind of exchange you know you you you have to give up something you know if you're making a trade right you you say okay i want this good here's the money right um you don't you don't get to die i'm going to keep my money in this good that's not a trade right that's not a market that's just taking something right so what the negative slope here represents is the trade-off okay now the the actual slope of it is the terms of the trade okay so the the how how steep is the slope represents what's called the opportunity cost okay so the first point is right if there's a negative slope there's always going to be a trade-off right that means that opportunity cost is always present okay opportunity cost is always present now the concept of opportunity cost okay let's just define this opportunity cost means it's the same thing that i've been talking about right it means what do you have to give up in order to gain something okay so the true cost of anything right is what you must give up in order to obtain it all right so this is whether things have a price tag or not right you know let's say that we're not even dealing with prices let's say that you're hiking in the woods you're you're miles and miles away from any store or market and yet there's still opportunity cost right because you're going for a hike let's say this happens you you're hiking along your path you say here's a path you could go to the right or you could you could go to the left right well what is the cost of of going on well isn't it free in either case right i mean you're hiking after all it's free or you're just enjoying nature yes in that sense it's free right but if you go to the right that means of course that you could not go to the left right so that is represents your opportunity cost right there's always something that you're giving up in order to do something else right that you know there's a only uh there's a limited amount of time out there right you're gonna hike you're not going to go on both of these right you have you have the time that you have right even if you said i'm going to hike on this trail and then i'm going to go back and hike this one as well right well there's other things you could be doing with your time right so there's always a there's always something that you're giving up right that so the we measure the opportunity cost by the next best alternative okay so it's it's um all right again i think you guys get the idea right you the what you must give up in order to to gain okay so we can actually measure the opportunity cost here right so we can say look if we're going from point a to point c okay we need to throw in a couple more numbers right but let's say that what happens uh in terms of berries is we go from 2000 down to 1800 okay however we go from zero over here to let's say 500 on this axis right so the opportunity cost representing the loss that we experience relative to the gain that we experience right because look the language of opportunity cost it's it's called cost right that that tells us it's like what do we have to actually give up in order to gain okay so the loss right we started at 2 000 then went to 1800 right the loss in this case is the the negative change over the positive change okay so the change in good one relative to the change in in good two now opportunity cost is always the loss over the gain so that means if we were going the other direction if we were going from c to a it would be the change in in good two over the change in good one so in other words we're always going to put the loss on top all right so in this example the loss is 200 now we're just going to put a little negative sign in front of that okay just to indicate that it's a loss okay the gain is 500 okay so negative 200 over 500 when we when we do the math we get negative 0.4 all right so the opportunity cost negative 0.4 all right what does that mean that means for every pound of meat that we gain here right we give up 0.4 pounds of berries okay so that would be how we would interpret it all right so for each pound of meat gained we must give up four pounds of berries right that would be we we put the opportunity cost into a sentence all right now what we notice along here is there's an actual curve right this is not a straight line and if the opportunity cost has something to do with the relationship between the loss and the gain we might be able to see that that relationship does not stay the same right that's the meaning of it right if it's this steep between these two points we can see it's less steep and less steep as we go along this curve right so the slope of the opera of the production possibilities frontier represents this opportunity cost okay it's going to be either the slope or the inverse of the slope depending on which direction we're going right if we were going from c to a right this would be the loss okay let's just let's just do that one okay so c to a again the opportunity cost represents the loss over the gain but if we're starting at c we're starting at 500 and going down to zero all right so that's a negative 500 right and we would have a gain on this side of 200 okay so negative 500 over 200 gives us negative 2.5 right now interpretation what does that mean this means if we are at point c and we were going to point a right that's our that's our situation for each pound of berries that we gain we give up two and a half pounds of meat all right so which way that we're going there's going to be a different relationship between which one is loss and which one is gained okay so to summarize the concept of opportunity cost it is going to be either the slope of the ppf or one over the slope depending on you know which direction we're going right which direction that we're going because that that signifies which one is loss and which one is gain okay but in general opportunity cost is always the loss relative to the game okay so very important all right now there's a couple of other things that that kind of jump out at us right so like i said we look at the production possibilities frontier we can see it's got a negative slope we can also see the slope changes along the curve right so the the fact that the production possibilities frontier is curved indicates that the opportunity cost changes along the production possibilities frontier all right changes along the past the production possibilities frontier uh there are some detailed technical reasons for this which we'll get into later in the course uh but for now let's just say let's imagine that the uh the resources cannot be transferred from one to the other uh totally seamlessly right like in other words uh let's say that the resources are committed uh to you know one kind of production okay and they're committed to so an example of a resource being committed is let's imagine that we have skilled hunters or gatherers all right remember our example has to do with hunting produces meat gathering produces berries so if there are skilled hunters or skilled gatherers well if we transfer them to the other kind of production they're not going to produce as much but there's going to be a big loss right you take your best hunter out of hunting and they're just an okay gatherer well you're just gonna hunting the meat production can take a big hit but the gathering production is not gonna rise as much right so that produces a a differential right and that's what that's one of the things that can give rise to a curve a curved production possibilities frontier right so the curve indicates the opportunity cost changes is not static along its entire frontier okay so we can also use this to define a couple of other concepts again let me just draw this one more time all right so ppf okay so again the what the production possibilities frontier represents is the maximum output right and we can define that as productive efficiency okay the maximum output given our resources and our technology now that also enables us to see very clearly well what would be below that right what would be below the optimal right so maximum output productive efficiency this is often called optimal an optimal situation economic theory optimality would be below that right below optimal means sub-optimal okay so any point like if we if we were to choose a couple of points right point a point b point c all of these points as long as they're along the curve represent efficient points okay so points a b and c are all optimal right even though they represent different levels okay so look at this right a has the most good two right that is if we move from a to b we're gonna see a loss in good two but we're gonna get a gain in good one right and if we move on to point c we're gonna have to see a further loss in good two in order to get that additional gain in good one all right however all of these points are optimal because they all represent the best that society can do given its resources and technology okay now it should be obvious right that if if this is the most you can produce a good two given that you're producing this amount of good one well what if you were producing that same level of good two but you were producing less of good one right that is you're somewhere inside the curve okay let's say you're at point d okay point d along with any point inside the production possibilities frontier the ppf is sub-optimal all right sub-optimal that means it's inefficient okay it doesn't represent a maximum in terms of output okay so society could be producing more than that right now here's the thing of course the society always has the option of doing worse than it's best right like just like you or i we could always do worse than our best all right we we can't do better than our best right our best represents you know the absolute you know most we can produce or whatever right we can't do better than that but we can do worse okay so society always has the option of producing less than it's that it's maximum right and that's just inefficient okay now what about a point that's outside of that okay we're producing the same amount of good two here's our maximum output of good one let's say that this is 1200 over here and this is 800 right but it could we produce that same 800 and also produce let's say this is point e some amount more like 2 000 right well no that's not possible right because we've defined what society's maximum is it's along this curve that means anything outside of it it's not going to it's not possible okay so point e is not possible all right it is in other words it's not attainable given society's resources okay so we can move along the production possibilities frontier right so we move along the ppf what is that what is society gonna have to do well if we want to move from say point c to point b we're going to have to take resources labor and capital out of q1 and put them into q2 okay that that's called a reallocation of resources all right now society can do that at any time right we can we we can have okay there's less people produce good one more people produce good too that's the reallocation of resources we can do that okay now some of the capital might not transfer right like like i said right there's a reason it's curved is because maybe some of our resources are committed to production right so i talked about labor right on the labor side we have skilled hunters and gatherers uh it's also possible that we could have some committed resources on the capital side right so remember reallocating resources means that we are taking both labor and capital out of the production of berries and putting them into the production of meat now not every kind of capital is going to transfer the same way right so like like imagine right you you have let's say you have a basket versus a bow and arrow right now these would be pieces of capital right these are things which are designed to produce other things okay so is having a basket helpful if you're gathering well i imagine so right i mean otherwise you're like okay how many berries can i fit in here i mean you're pretty limited right if you have a big basket oh man i can carry a lot more with a basket you know so basket is very very helpful for gathering but is it helpful for hunting i mean what are you gonna do with your basket kill an antelope with it or something i'm pretty difficult i don't know that's not gonna really transfer right i mean that's helpful he in here but it's not all that helpful here right that is taking that to to to hunting it's not going to be as much of a gain right it's it's not going to be as helpful okay and the same thing with the bow and arrow right very very helpful for hunting my god right that's this is fantastic uh have you ever tried throwing an arrow by hand how far can you throw it can you can you throw it hard enough to kill something uh i mean don't try that but use your imagination right you um versus shooting a bow you guys have a shot of bow my god it's no comparison right i mean you can you can shoot an arrow with a bow way further way harder uh than without it right so but see this is not going to transfer very well to gathering right now you don't need to shoot a berry just pick it up right the bow and arrow is going to do nothing to really help that okay so these are the capital might not fully transfer one to the other right that's what uh another reason why we would get a a curved production possibilities frontier instead of having it be a straight line all the way okay so we can reallocate resources that would move us along the production possibilities frontier there's nothing we can really do to get outside of it right that given our resources and technology that's our limit okay we can always be inside of it of course that's attainable right any point on here as long as it is up to the production possibilities frontier is attainable okay only the ones along this curve are efficient anything inside is is inefficient anything outside can't actually be judged on its efficiency because you can't possibly get to it right like okay so the next thing to explore here is how might this change okay so if it is resources right that is labor and capital and it is technology represented by the production function q equals a function of labor and capital if these things together drive the position of the okay they lead to the production possibilities frontier right which is a representation of society's efficiency societies maximum output right well then it would stand to reason that a change in resources and or a change in technology okay so triangles delta right change in a change in resources or technology is then going to lead to a change in the production possibilities frontier okay and we would we would depict that by showing it as a shift in the production possibilities frontier okay it's a shift in the ppf it's caused by a change in resources or a change in technology all right so imagine we started off okay q1 and q2 we had a production possibilities frontier that looked something like this right but over time we got more resources and better technology let's say and so the production possibilities frontier would shift out all right and that would give us a new collection of points okay so the initial production possibilities frontier pbf1 and the new one ppf2 after this shift okay so society's ability to produce stuff to produce wealth has been enhanced all right and this would be due to a change in resources or a change in technology or both okay so society can produce more right more output okay and the we would call this by the way we call this economic growth okay so neoclassical economics is very focused on a particular explanation of of economic growth okay sometimes this is okay so the economic growth according to according to neoclassical economics comes from the production side okay so production is also sometimes called the supply side okay so we will return to this when we talk about supply and demand right so there's broadly speaking right production and consumption okay so consumption represents the demand side right it's the spending or the use of the items that are produced whereas production uh is you know that again that's the side where it's produced okay so neoclassical economics is very very focused on production okay so one term for it sometimes it's called supply side economics this is a kind of term that came into use like back in the 1980s supply side economics because of its great focus on on you know resources and technology as being the ultimate cause of economic growth okay so again in terms of to try to draw a connection between this and what we talked about earlier essentialism and so forth these are the essences right so the essence the again the reason why the the output is what it is is because of the resources and the technology right those two things are very very important neoclassical economics right they see that as that is the essence of society's ability to produce okay so very very important all right this shift in the production possibilities frontier represents something incredible that's happened here right society is capable of producing more okay now we haven't talked at all about the third aspect of the economy okay which is distribution okay so production is how and what is produced okay consumption is how are these things used right distribution is the topic of who gets what in society okay so how much of society's total output total wealth am i going to get are you going to get right that's distribution okay we haven't talked about who gets society's wealth here at all if our resources or our technology shift or change in a way that only affects one area not the other then we're going to get a kind of rotation of the production possibilities frontier okay so if it affects only one side right q1 or q2 then only that side is going to shift okay so let's let's do uh some examples okay so let's say let's say we have a uh q1 q2 okay say we have something like this happening right a shift in the production possibilities frontier which changes the maximum level of output on the q1 axis but doesn't change it at all on the q2 axis right so what would this be uh this would be like i don't know let's say i mentioned baskets before right baskets are invented oh this is fantastic but we we don't have to just get put the berries in our hands like this we could we can put them all in this basket we can carry a lot more we can or our it's going to boost our gathering output right so right what does this represent well this this represents a change in technology okay so if that's what it is right a change in technology but that only affects this area it's going to only shift the curve on that axis right on the horizontal axis okay versus let's imagine that the shift occurs on any other area okay so then we would have for example something like this right so the pretty the maximum output has changed on the q2 axis okay so this would be like you know the bow and arrow will be invented let's say okay again not real helpful for gathering but very helpful for hunting okay so q2 is the median q1 is berries all right so we we have only a change on one side we're going to have a shift like in this manner okay we can always measure the opportunity cost we you know in terms of the slope or the inverse of the slope right very very important concepts that come out of neoclassical economics remember the theory is very focused on how does society produce the maximum amount of output and so we want to formally describe that right what is this maximum output where does it come from okay the the theory is going to have you know more to say about the production function we're going to explore that in a lot more detail as we go through the course but first we're just going to use this to create our foundation of prices okay now the production possibility frontier has also been used to provide a justification for trade and particularly for free trade okay this is called the theory of comparative advantage all right and it's a an argument uh used to argue in favor of free trade now whenever we're talking about this what do we mean by this free trade we mean that any kind of tariffs or quotas or you know any kind of restriction on trade of any kind right sanctions get rid of it right you shouldn't have tariffs or if you should you're going to be at the lowest possible level quota is a limitation on trade and so forth right get rid of all these limitations okay and this this argument comes from uh ricardo all right ricardo another important figure in classical political economy which later morphs and develops into neoclassical economics and this part of it ricardo is really remembered for for contributing to okay so in order to understand it right let's imagine that we have two societies all right two societies and have two very different production possibilities frontiers okay so we will call uh we'll call these two societies hunterville and gather land right neighboring uh neighboring societies okay so we had q2 and q1 and you know the these societies are good at different things right hunterville they're very good at hunting they're not as good at gathering okay so their situation is let's say kind of like this okay so they have a production possibilities frontier that indicates well if they if they produce meat they can produce a lot of it right but if they want to produce all get berries there's much less they're capable of producing okay now in the gatherland side their situation is is reversed okay they their production possibilities frontier is they can produce a lot of berries they put their mind to it but if they they all produce meat they're going to produce a lot less okay so these two societies have different advantages okay so we would what we call this is we could say absolute advantage define that right is when a society can produce more you produce a lot more all right now let's just put some numbers on this right so let's say that up here we have let's say this is 500 and up here 1500 okay and just reverse that okay so we can see each society here has an absolute advantage right they can produce more than the other one right the gather land can produce a lot more berries hunterville can produce a lot more meat okay now comparative advantage on the other hand is when society can produce at a lower opportunity cost okay so can produce at a lower opportunity cost okay so in order to understand this right like we have to say all right for for hunterville let's just take two simple examples right there they want to be at point a or at point b right so a point a represents well they're producing 500 of the berries and zero of the meat right and point b the opposite right zero and now 1500 okay so what is the opportunity cost for them right if they produce at point b well they what's the loss over the gain right they give up this 500 right if we say you know b versus a okay we give up that the the opportunity cost is 500 over 1500 okay so so opportunity cost at point b right moving from a to b okay 500 over 1500 right the loss over the gain so the opportunity cost is negative 1 3 or negative 0.33 repeating right so all right one third okay that's our opportunity now for gather land you know their their situation is reversed right so for them if if they consider what what is their opportunity cost at point b so again point b well to be at point b relative to point a they would have had to give up 1500 right their loss is 1500 over their gain is 500 right so that's a very different situation here right very different situation they negative three right however they have a much lower opportunity cost of being at point a right so point a okay opportunity cost point a that one's going to be negative one-third right the loss 500 the gain 1500 okay so comparative advantage is when you can produce at a lower opportunity cost absolute advantage is just the total number that you can produce is bigger okay so what we can see here is that each society has a comparative advantage in producing one thing versus the other right one thing versus the other and so what ricardo's argument was is the society should produce where they have a comparative advantage and then they should trade okay so by doing this they're able to do much better than they would be able to do on their own right so produce where you have comparative advantage then trade all right so imagine that both sides did this right hunterville produced you know 1500 of pounds of meat and gather land produce 1500 pounds of berries now they're not happy with that situation right because they both societies would like to consume both meat and berries right because you know come on it tastes better to have both right so they would like to they'd like to have both but each side should produce the thing that they're the best at and then they should trade okay imagine that they trade at one to one okay so imagine that the terms of the trade we would have to know more of course to know what the price of these things was relative to each other but let's just imagine that they trade one pound for one pound okay so after they trade then gather land ends up with 750 of each right they started off with 1500 pounds of berries zero of the other right they take half of their berries and they trade it for 750 pounds now that that's that's fanta then they end up here right there they are right they are at a much better point c okay i know i i added a bunch of stuff to my graph but you can see right we're we're well we're well uh above 500 right we're below 1500 on this side but you know so that is through trade through specialization and trade we are then able to and i mean the same thing for uh for hunterville right they are able to be at a point that is well outside of the production possibilities frontier right and this represents the gains to trade okay so gains a trade so ricardo is remembered for making an argument for why it is more efficient for societies to specialize and then trade and again is seen as a one of the foundational arguments for free trade okay that's my lecture on this topic thank you very much