1. Econ 206(A) Tutorial 1 - Examples
Colin Green

2. Opportunity Cost - Example
What does it cost to go to University?
Direct Costs:
Tuition Fees + Living Expenses etc
Opportunity Cost?
Lost Earnings (for instance £15K a year for 3 years)

3. Absolute and Comparative Advantage – Example
2 Countries: Portugal and England
2 Products: Wine and Cloth
Portugal can produce 100 wine or 50 cloth (or a mixture)
England can produce 20 wine or 40 cloth (or a mixture)

4. Mixture (pre trade) Cloth Wine Portugal 25 50 England 20 10 Total 40
100

5. Absolute Advantage 2 Questions:
Which Country has absolute advantage in cloth production?
Which Country has absolute advantage in wine production?
Portugal: It can produce more of both

6. Opportunity Cost
What is the opportunity cost of cloth production in both countries?
Portugal = 2 units of Wine
England = ½ unit of Wine
What is the opportunity cost of wine production in both countries?
Portugal = 1/2 unit of Cloth
England = 2 units of Cloth

7. Portugal 50 or 100 2 wine England 40 or 20 ½ Wine Cloth Wine
Opportunity Cost of producing 1 cloth
Portugal
50 or
100
2 wine
England
40 or 20
½ Wine

8. Comparative Advantage
1. Which country has comparative advantage in cloth production?
England as its opportunity cost of cloth production is lower.
2. Which country has comparative advantage in wine production?
Portugal as its opportunity cost of wine production is lower.
Optimal for each country to specialise and then trade
with each other.

9. Specialisation
Cloth
Wine
Portugal
100
England 40
Total

10. Trade
It pays to specialise because of trade. Assume some simple prices:
For example: England requires at least 1/2 unit of wine for 1 unit of cloth.
Portugal needs at least 1/2 unit of cloth for 1 unit of wine.
If we take some middle price (1 units of cloth per unit of wine). Then both countries can be better off through specialisation and trade.

11. Post Trade Portugal 20 80 England Total 40 100 Cloth Wine
Assume Portugal trades 20 wine for 20 cloth. Both can consume a combination of cloth and wine that was not possible pre-trade

12. Cloth Wine Portugal 10 80 England 20 Total 100
Pre Trade Comparison (If Portugal & England produced the same amount of wine as their post trade amount)
Cloth
Wine
Portugal 10 80
England 20
Total
100

13. Comparative Advantage (2) Specialisation in Labour
An individual is the best lawyer and the best secretary in town.
(i.e. has absolute advantage in being a Lawyer and a Secretary)
What should they do?