Video Transcript: Comparative Advantage

Hi, welcome back. In this video, we're going to discuss comparative advantage  specialization and gains from trade. So we're going to illustrate this on the  board, right? So we can see how we can create a comparative advantage  through specialization. So let's go ahead and draw our graph, right? So  remember, this is specialization, right? So we're creating a competitive  advantage through specialization, right? So so we're going to look at two  entities, right? So we're going to look at Charlie and Patty, right? So, so if you  remember back to video four and lesson in unit one, right? We talked about the  production possibilities frontier curve, right? So we are going to illustrate the  PPF for Charlie and Patty, right? So here we're going to look at the  specialization or or the production of cups and plates for both Charlie and  Patty's company, right? So so let's start here. So we'll go cups this way, right?  So let's go 30, 20, 10. Right, so these are cups down here, plates. Right, so  they're going to specialize in cups or plates. Right, so we're going to figure out  who is best suited to develop what. Right, so here again 10, 20, 30. Okay, so  now we see for Charlie that Charlie can produce 30 cups. Right, Charlie can  produce 30 cups, but if Charlie produces 30 cups, he can only produce 10  plates. Right, so this is Charlie's PPF, right? This is Charlie's production  possibility frontier, right? This is his PPF, right? So, so he can, so if he creates  10 plates, he can create zero cups. But if he creates 30 cups, he can create  zero plates, right? So anything inside of here is inefficient. Anything outside of  here is impossible due to the amount of resources that Charlie has. Right. So  now let's look at Patty's PPF. Right. Her production possibility frontier. She can  create 10 cups. Right. But then she can create 30 plates, right? So her PPF  runs like this. Okay. So now this is Patty's PPF, right? Patty PPF. Okay. So now  let's look at the opportunity cost for Charlie's production. Right, so, so, so here  we go. We've got the opportunity cost for Charlie. Okay, we got the opportunity  cost for Charlie. Right, so so 10 plates Equals 30 cups. So again, if he creates  10 plates, that'd be the same as if he created 30 cups. But if he creates 10  plates, he can create zero cups. If he creates 30 cups, he can create zero  plates. Right. So if you reduce this down, you can see that one plate equals  three cups, right? Right. So now you can look at so so he can he can produce  three to one cups to plates, right? So so he can create three to one, right? He  can create three to one cups to plates, right? So three to one cups to plates,  right? So now, so now his specialization is clearly going to be cups, right?  Because he can create three more cups than he can place. So, so Charlie's  going to specialize. Charlie's going to specialize in cups because it's three to  one, right? So he can specialize in cups. But let's look at let's look at Patty's  opportunity cost, right? What can she do? Right. So, so, so we look at Patty  opportunity cost. Okay. Right. So, so, so she can create 30 plates. Right. She  can create 30 plates. Right. To her 10 cups. Okay, so so so we're trying to figure  out what can Patty, what is Patty going to specialize in, cups or plates, right? So 

now we look at it like this, right? So so here we can we can reduce this down  again, three to one, right? So so so 30 divided by 10 is three, right? So three to  one plates to cups, right? So so here we can see that Patty clearly has a  specialization in place. Now, how can these two? How can Patty and Charlie?  How can they collaborate, and how can they take advantage of their  specialization, well, they can take care of their specialization through trade.  Okay, so so here now we can see, right? See here, now we have a equilibrium  at 20. Now, if this happens, now our PPF curve will shift. Right for Charlie, PPF  curve for Charlie will shift relative to cups. Right, he can shift out this way if he  specializes only in cups, right? Now, now also now, now Patty, she will shift  inward if she produces plates, right? Because now she's maximizing her plate  value, right? So now what we can do is we can look at where are they going to  provide these specialties, right? So so Charlie and Patty, they both still want to  sell plates and cups, but because Charlie can produce at a cheaper cost more  cups than plates, maybe he can trade with Patty, right, and he can trade some of his cups for some of her cheaper cost plates, right, because it costs him more  money to make plates, right? We can make cups at a three-to-one value over  plates, as far as Charlie's concerned. But Patty is just the opposite. Patty can  create three-to-one plates to cups, right? So, so if these two collaborate  together, right, they can work out a trade scenario to where they can both  benefit, right? Because they both benefit from specialization. They they max  their resources out towards in Charlie's case cups and Patty's case plates,  right? And because they've now maximized their resource value, right? And they haven't incurred the high cost for either cups or plates, right? Relative to who  they are, right? Now they can create. They they've invested all their resources  and all their funds to what they specialize in. Now because they both want to  trade and they both want to sell cups and plates, now they can trade cups and  plates to each other. But because of what they were producing as a more  expensive rate, now they can get that at a lower rate because now Patty can  specialize in plates and Charlie can specialize in cups. Therefore, pushing down the cost of plates and cups through specialization. Right now they can trade for  what they want, right, and and and and pay a cheaper price because of  specialization than if they had produced it themselves. So through  specialization, we can have gains from trade where both sides can benefit  equally.