2. Question 1
• Give an example of a good or service that you
regularly buy. Then give an example of a
good or service you provide in your own
household. Why don’t you become more self-
sufficient?
3. Question 1
• Give an example of a good or service that you
regularly buy. Then give an example of a good or
service you provide in your own household. Why
don’t you become more self-sufficient?
• Examples of regularly purchased items or services
could include food for meals or a contracted lawn-
mowing service
• Examples of goods or services could include home-
gown vegetables or washing dishes
4. Question 1
• Give an example of a good or service that you
regularly buy. Then give an example of a good or
service you provide in your own household.
Why don’t you become more self-sufficient?
• Self-sufficiency would mean producing goods
and services you don’t have a comparative
advantage in. This would tend to make you
worse off
5. Question 2
• George and
Martha face the
production
possibilities
frontiers shown
for brownies
and cupcakes.
6. Question 2
a. If George and Martha choose not to trade and divide their time equally
between the production of brownies and cupcakes, how many of each
would they be able to consume? (Show this point on your graphs.)
b. Now assume that George and Martha each decide to specialize in the
good in which they have a comparative advantage and then trade. Who
would trade brownies and who would trade cupcakes?
c. c. If George and Martha decided to trade 60 brownies for 60 cupcakes,
how many cupcakes and brownies would each have to consume?
d. d. How do we know each is better off with trade than acting alone?
7. Question 2 (a)
• If George and Martha
choose not to trade and
divide their time equally
between the production of
brownies and cupcakes,
how many of each would
they be able to consume?
(Show this point on your
graphs.)
• If George and Martha
divide their time equally,
George would be able to
produce 50 brownies and
100 cupcakes (point A on
his PPF) and Martha would
be able to produce 80
brownies and 40 cupcakes
(point A on her PPF)
8. Question 2 (b)
• Now assume that
George and Martha
each decide to
specialise in the
good in which they
have a comparative
advantage and then
trade. Who would
trade brownies and
who would trade
cupcakes?
9. Question 2 (b)
• George’s opportunity cost:
• If George uses all his time
to produce Brownies he
makes 100 Brownies
• If George uses all his time
to produce Cupcakes he
makes 200 Cupcakes
10. Question 2 (b)
• George’s opportunity cost:
• Hence, for George 100
Brownies are equivalent to
200 Cupcakes
• For George:
– 1 Brownie = 2 Cupcakes , or
– 1Cupcake = ½ Brownie
11. Question 2 (b)
• Martha’s opportunity
cost:
• If Martha uses all her
time to produce
Brownies she makes 160
Brownies
• If Martha uses all her
time to produce
Cupcakes she makes 80
Cupcakes
12. Question 2 (b)
• Martha’s opportunity
cost:
• Hence, for Martha 160
Brownies are equivalent
to 80 Cupcakes
• For Martha:
– 1 Brownie = ½ Cupcakes
– 1 Cupcake = 2 Brownie
13. Question 2 (b)
• George has a
comparative
advantage in and
would trade,
cupcakes;
• For him the
opportunity cost of 1
cupcake is ½ Brownie
• For Martha the
opportunity cost of 1
cupcake is 2
Brownies
14. Question 2 (b)
• Martha has a
comparative advantage
in and would trade,
Brownies;
• For Martha the
opportunity cost of 1
Brownie is ½ Cupcake
• For George the
opportunity cost of 1
Brownie is 2 Cupcakes
15. Question 2 (c)
• We assume total
specialization:
• George has comparative
advantage in Cupcakes
and hence would
specialize in Cupcakes
• Martha has comparative
advantage in Brownies
and hence would
specialize in Brownies
16. Question 2 (c)
• Since George is
producing 200
cupcakes and no
brownies, if he
traded 60
cupcakes, he would
be left with 140
cupcakes and would
expect to receive 60
brownies from
Martha in return.
17. Question 2 (c)
• Since Martha is
producing 160
brownies and no
cupcakes, if she
traded 60 brownies,
she would be left
with 100 brownies
and would expect to
receive 60 cupcakes
from George in
return.
18. Question 2 (d)
• We know that both
George and Martha
are better off with
trade because both
are able to
consume outside
their own
production
possibilities
frontiers
19. Question 3
• The table below describes the production
possibilities for Lee and Amy in a four-hour
shift.
Coffee Croissants
Lee 20 15
Amy 8 16
20. Question 3
• a. What is the opportunity cost of one coffee for each
person? What is the opportunity cost of one croissant?
• b. Who has a comparative advantage in coffees? Who
has a comparative advantage in croissants?
• c. Who has an absolute advantage in coffees? Who has
an absolute advantage in croissants?
• d. Who should produce coffees? Who should produce
croissants?
21. Question 3 (a)
• If Lee uses all his time to produce Coffee he can
make 20
• If Lee uses all his time to produce Croissants he
can make 15
• Hence for Lee 20 Coffee = 15 Croissants
• Or 1 Coffee = ¾ Croissants
22. Question 3 (a)
• If Amy uses all his time to produce Coffee she
can make 8
• If she uses all his time to produce Croissants she
can make 16
• Hence for Amy 8 Coffee = 16 Croissants
• Or 1 Coffee = 2 Croissant
23. Question 3 (a)
• The opportunity cost of one coffee for Lee is
3/4 croissants and the opportunity cost of
one coffee for Amy is 2 croissants.
• The opportunity cost of one croissant for Lee
is 1 1/3 (=4/3) coffee. The opportunity cost of
one croissant for Amy is 1/2 coffee.
24. Question 3 (b)
• Lee has a comparative advantage in coffees
• Amy has a comparative advantage in
croissants.
25. Question 3 (c)
• Lee has an absolute advantage in coffees
• Amy has an absolute advantage in croissants.
26. Question 3 (c)
• For absolute advantage we look at the
operating cost rather than the opportunity
cost
27. Question 3 (c)
• If Lee uses all his time (which is his operating
cost) to produce Coffee he gets 20
• If Amy uses all her time to produce Coffee she
gets 8
• Hence, Lee has an absolute advantage in
producing Coffee
28. Question 3 (c)
• If Lee uses all his time (which is his operating
cost) to produce Croissants he gets 15
• If Amy uses all her time to produce Croissants
she gets 16
• Hence, Amy has an absolute advantage in
producing Croissants
29. Question 3 (d)
• Based on their COMPARATIVE ADVANTAGES:
• Lee should produce coffees
• Amy should produce croissants
31. Objectives (Week 2)
Students should be able to:
1. understand the concept of opportunity cost
2. define, explain ,analyse and apply the theories of trade such as
absolute advantage and comparative advantage to current
economic issues and examine their implications for business in a
national and international context
3. examine the international trade environment, policies and
institutions
37. Another Example:
• Absolute advantage does not mean comparative advantage:
• Country B has absolute advantage in Notebooks and Pens, but does
it have a comparative advantage in both?
• Also see Textbook at 56, paragraph 4
100
300
Notebooks
Pens
Country A
200
1000
Notebooks
Pens
Country B
39. After Trade
George Martha
60 Brownies
200 Cupcakes
160 Brownies
60 Cupcakes
140 Cupcakes
10 more than before
40 more than before
100 Brownies
20 more than before
20 more than before
