1. Specialization and Trade (1.3)
Production possibilities frontiers represent the principles of tradeoffs and opportunity costs.
Definition of Opportunity Cost: whatever must be given up to obtain some item.

2. Points outside the PPF are unattainable
Computers (millions per year
Points outside the PPF are unattainable B
Points on the PPF are attainable and efficient due to full employment C A
Points inside the PPF are attainable but inefficient due to unemployment
Food (tons per year)

3. Economic Growth Sustained rise in aggregate output (GDP)
Technology shifts PPC outward.

4. Calculating Opportunity Cost
Opportunity cost is a ratio. Along a PPF, the opportunity cost of one good equals the quantity of the other good forgone divided by the increase in the good.

5. Example Production possibilities for Robinson Crusoe OC of Fish/Fruit
Possibility Fish (pounds) Fruit (pounds) A B C D E F G H I

6. Solution to Example
Production possibilities for Robinson Crusoe Opportunity Cost of fish/fruit
Move From Increase Fish Decrease Fruit
A to B
B to C
C to D
D to E
E to F
F to G
G to H
H to I

7. Comparative Advantage
Definition of Comparative Advantage: the comparison among producers of a good according to their opportunity cost. The ability to perform an activity or produce a good or service at a lower opportunity cost than someone else.
Comparative Advantage and Trade
1. When specialization in a good occurs (assuming there is a comparative advantage), total output will grow.
2. As long as the opportunity cost of producing the goods differs across the two individuals, both can gain from specialization and trade.

8. Absolute Advantage
Definition of Absolute Advantage: the comparison among producers of a good according to their productivity. When one is more productive than another in several or even all activities.

9. Specialization and Trade
Liz and Joe each own a vegan bar
Liz can spend all her time producing either 40 salads or 40 smoothies an hour. She can split her time equally and produce 20 salads and 20 smoothies an hour.
For each additional smoothie Liz produces, she must decrease her production of salads by one., and for each additional salad she Liz produces, she must decrease her production of smoothies by one.
Liz’s OC of producing 1 smoothie is 1 salad.
Liz’s OC for producing 1 salad is 1 smoothie.

10. Specialization and Trade
Joe can spend all his time producing either 30 salads an hour or 6 smoothies per hour. Therefore, he can make a salad in 2 minutes or a smoothie in 10 minutes. For each additional smoothie Joe produces, he must decrease his production of salads by 5. And for each additional salad Joe produces, he must decrease his production of smoothies by 1/5 of a smoothie.
Joe’s OC of producing one smoothie is 5 salads
Joes OC producing one salad is 1/5 smoothie

11. Trade with Other Countries?
The principle of comparative advantage suggests that each good should be produced by the country with a comparative advantage in producing that good (smaller opportunity cost).
Through specialization and trade, countries can have more of all goods to consume.

12. Now we look at opportunity cost, Comparative Advantage and Gains from Trade, Comparative Advantage and Absolute Advantage

13. Increasing Opportunity Cost 
Opportunity Cost

14. Comparative Advantage and Gains from Trade
Comparative Advantage and Absolute Advantage