Class 21 - Making the World Richer and PPF/PPC

Today we talked about comparative advantage.

One example is Rizzo has a huge collection of baseball cards worth $8000 but is missing one card so it is really just $1000. He has an extra card worth $200 and trades it for the needed card worth $0.02. Rizzo turned something worth $200 into $7000 while his friend turned the $0.02 card into $200. Rizzo had $1200 and his friend had $0.02. After the trade Rizzo had $8000 and his friend had $200. $1200.02 was turned into $8200 and now the world is $6999.98 richer.

Another example is in yard work. Rizzo and Rich have the same size yard. Rizzo weeds his lawn in 80 minutes and mows it in 40 minutes. His neighbor Rich weeds in 120 minutes and mows in 120 minutes. Initially Rizzo does 120 minutes of work and Rich does 240 hours or work. Rich comes up with the idea that he will weed 3/4 of Rizzo's yard if Rizzo mows Rich's lawn. Now Rich does 120+90 = 210 minutes of work while Rizzo does 20+40+40 =100 minutes of work. Both benefit and the total work is cut by 90 minutes. Rich saves more time (30 min vs 20 min) but Rizzo's time is cut by a bigger fraction (1:6 vs 1:8).

We then talked about Production Possibilities Frontier (PPF) and the Production Possibilities Curve (PPC). These operate under the ideas that all points on the line are feasible and the ones outside the line are not. It shows the absolute advantage. The PPC shows productive efficiency. The slop shows that we must make tradeoffs between goods. You can see the law of diminishing returns from the lines. And economic growth comes from increasing resources, discovery/technology, and trade.