BASIC ECONOMIC CONCEPTS

• PRODUCTION POSSIBILITY FRONTIER (PPF)

• OPPORTUNITY COST
• ABSOLUTE ADVANTAGE
• COMPARATIVE ADVANTAGE
• SPECIALIZATION
• EXCHANGE

1
Interdependence
hair gel from China
Every day
you rely on
many people cell phone
from around from Taiwan
the world,
most of whom
dress shirt from
you’ve never met,
Vietnam
to provide you
with the goods
and services coffee from
you enjoy. Kenya

2
PRODUCTION POSSIBILITY FRONTIER (PPF),
OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE.
Two countries (namely A and B) produce car and rice, both
countries have 720 labors. Below table shows the required
labors to produce one unit of rice or car.
a. Draw the production possibility frontiers. Show your choice
of production as each country equally allocates the resources.
b. What is the opportunity cost to produce each item?
c. Find the absolute advantage and comparative advantage of
each country (if any)
d. If countries specialize and exchange? Show the result on the
diagrams

PRODUCTION POSSIBILITY FRONTIER (PPF),

OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE.
Opportunity Balance
Cost Total Specialization Exchange
cost resources
Car Rice Car Rice Car Rice Car Rice Car Rice Car Rice
A 18 6
B 20 5

Car Rice Exchange Price

Absolute Advantage
Comparative Advantage

3
240
220
200
180
160
140
120
100
80
60
40
20

0 5 10 15 20 25 30 35 40

PRODUCTION POSSIBILITY FRONTIER (PPF),

OPPORTUNITY COST, SPECIALIZATION AND EXCHANGE.
Opportunity Balance
Cost Total Specialization Exchange
cost resources
Car Rice Car Rice Car Rice Car Rice Car Rice Car Rice
A 20 5
B 18 3

Car Rice Exchange Price

Absolute Advantage
Comparative Advantage

4
240
220
200
180
160
140
120
100
80
60
40
20

0 5 10 15 20 25 30 35 40