1. Production Possibilities Curve/Frontier -
Capital goods
Consumer goods
Law of increasing costs

2. Allocative efficiency: producing the particular mix of goods and services demanded by the society
Impossibe to know from PPC; requires social Supply + Demand curves
Changes in allocative efficiency movement of point

3. Shifts in the Curve Change in the quantity or quality of resources
Achieved primarily through capital (physical or human) investment
Adam Smith (The Wealth of Nations, 1776): capitalism a capital accumulating machine

4. Ireland Puerto Rico Crystal Rum Crystal Rum A B C 1 million 0
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Crystal Rum
Crystal Rum A B C
1 million
700,000 30,000
,000 A B C
80,
40,000 40,000
0 80,000

5. Crystal
Crystal A
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Which country has the absolute advantage in the production
of Crystal? In the production of Rum?

6. Which country has the comparative advantage in Crystal? In Rum?
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Which country has the comparative advantage in Crystal?
In Rum?

7. There are___steps in figuring out which country has
Crystal
Crystal A
1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
There are___steps in figuring out which country has
the comparative advantage. 5

8. 1. Know the definition of comparative advantage
Crystal
Crystal A
1 mil. B
700,000 A
80,000 B
40,000 C C
100,000
Rum
30,000
40,000
80,000
Rum
Ireland
Puerto Rico
1. Know the definition of comparative advantage
One entity can produce something at a LOWER OPPORTUNITY COST than another entity.
2. Set up a table:
Ireland Puerto Rico
1 Rum = __Crystal Rum = __Crystal
1 Crystal = __ Rum Crystal = __Rum
3. Go to the Xtremes (X and Y Games)

9. 1. Know the definition of comparative advantage
Crystal
Crystal A
1 mil. B
700,000 A
80,000 B
40,000 C C
100,000
Rum
30,000
40,000
80,000
Rum
Ireland
Puerto Rico
1. Know the definition of comparative advantage
Ireland Puerto Rico
1 Rum = __Crystal Rum = __Crystal
1 Crystal = ____ Rum Crystal = __Rum
2. Set up a table: 10 1
1/10 1
3. Go to the Xtremes (X and Y Games)
4. Fill in the blanks (starting with Puerto Rico first)
5. Circles and Arrows

10. We decided that Ireland should produce ALL the crystal and
1 million B
700,000 A
80,000 B
40,000 C C
100,000
Rum
30,000
40,000
80,000
Rum
Ireland
Puerto Rico
We decided that Ireland should produce ALL the crystal and
Puerto Rico should produce ALL the rum. How much crystal should
Ireland produce?
1 million cases
How much rum should Puerto Rico produce?
80,000 barrels
Should Ireland just hold onto its cases of crystal and Puerto Rico just
hold onto its barrels of rum?
NO!
What should each country do after specialization?
Trade

11. Terms of trade Cost Ratio Ireland: 1 R = 10 C Puerto Rico: 1 R = 1 C
Must get more than this ratio, or why trade?
Actual terms depend on supply and demand

12. Ireland Puerto Rico IRELAND PUERTO RICO Crystal Crystal A 1 million B
700,000 A
80,000 B
40,000 C C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Consumes Consumes
after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
IRELAND
C 1 million ,000
R ,000
825,000
700,000
+125,000
35,000
30,000
+ 5,000
PUERTO RICO C
R ,000
+175,000
175,000
40,000
+135,000
-35,000
45,000
40,000
+5,000

13. Ireland Puerto Rico IRELAND PUERTO RICO Crystal Crystal A 1 million
175,000 D
Crystal
Crystal A
1 million D
825,000
700,000 A B
80,000
40,000 B
35,000 C
45,000 C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Consumes Consumes
after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
IRELAND
Plot
this
column
C 1 million ,000
R ,000
825,000
700,000
+125,000
35,000
30,000
+ 5,000
PUERTO RICO C
R ,000
+175,000
175,000
40,000
+135,000
-35,000
45,000
40,000
+5,000

14. 175,000 D
Crystal
Crystal A
1 million D
825,000
700,000 A B
80,000
40,000 B
35,000 C
45,000 C
30,000
100,000
Rum
40,000
80,000
Rum
Ireland
Puerto Rico
Which country is obviously better off through this
specialization and trade--Ireland or Puerto Rico?
Both Countries are!!!
Both countries are now outside their own production
capabilities. Through specialization and trade all
parties are better off.