Class 22 - Wine and Cameras. Sounds Like a Good Class.

Today we talked more about PPF-production possibility frontier.

We looked at comparative advantage. Absolute advantage is just the ability to produce something. Comparative advantage is how much more efficient you are at producing something than someone else.

Efficiency = less tradeoffs

Comparative advantage shows that self-sufficiency is the road to poverty.

For example: There are only cameras and wine produced by Rochester and Cornell.

Rochester can make 5 cameras and 10 bottles of wine. Cornell with the same resources only makes 4 cameras and 3 bottles of wine. Rochester has the absolute advantage compared to Cornell.
So who has a lower opportunity cost? Who does it cost less for? Who has to make less tradeoffs?
So for Rochester, 1 camera = 2 wine and 1 wine = 1/2 a camera. For Cornell,  1 camera = 3/4 wine and wine = 4/3 camera.

Rochester has a comparative advantage in making wine compared to Cornell. But Cornell has a comparative advantage in making cameras compared to Rochester.
Rochester has a lower opportunity cost so it has a comparative advantage over Cornell.

Nobody can have a comparative advantage in everything!

Now let's say that Rochester had 10 wines and 0 cameras and Cornell has 0 wines and 4 cameras. Rochester gives 3 wines and Cornell gives 3 cameras. The price of exchange was 1wine/camera. Now Rochester has 7 wines and 3 cameras while Cornell has 3 wines and 1 camera. Both schools now operate outside the PPF (look at notes) so trade is sustainable and profitable.

Restricting trade is costly.

The world is richer.