If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:9:55
AP.MACRO:
MKT‑1 (EU)
,
MKT‑1.A (LO)
,
MKT‑1.A.1 (EK)
,
MKT‑1.A.2 (EK)
,
MKT‑1.B (LO)
,
MKT‑1.B.1 (EK)
,
MKT‑1.B.2 (EK)
AP.MICRO:
MKT‑2 (EU)
,
MKT‑2.A (LO)
,
MKT‑2.A.1 (EK)
,
MKT‑2.A.2 (EK)
,
MKT‑2.B (LO)
,
MKT‑2.B.1 (EK)
,
MKT‑2.B.2 (EK)

Video transcript

what we're going to do in this video is draw a connection between the idea of opportunity cost of producing a good in a certain country and comparative advantage between countries in a certain good and below right over here we have a chart that shows the production possibility curve for two different countries and as we see in many economic models this is a argue oversimplified model but it helps us get some insights where in each country workers can only produce some combination of sneakers and basketballs and to help us understand this and to appreciate that you can see this information in multiple ways let's present this also as an output table output table which you will sometimes see and from either the production possibility curve or from the output table we can calculate the opportunity cost of shoes and the opportunity cost of basketballs and then try to deduce some things about comparative advantage so in an output table we would look at country a and we would look at country B and we would think about well what is the max and I'll just draw it what is the max basketballs and this is all per worker per day and we would also think what is the max shoes shoes those look like socks but you get the idea once again per worker per day and so let me draw a little chart here so we can do that and so what I'd like you to do is pause this video and see if you can fill in this chart what is the maximum basketballs per worker per day in country a and then in country B and then do the same thing for shoes all right now let's work this together so first in country a what is the maximum number of basketballs well if in country a they put all of their energy into basketballs we are right over here on the production possibilities curve they can produce eight basketballs and if I the other end of the curve they put all of their energy into shoes they would produce no basketballs and six pairs of shoes we're assuming that these are pairs shoes that we're talking about six pairs of shoes and similarly if we go to company if we go to country B I keep saying company instead of country if we go to country B if we say what's the maximum number of basketballs well if they put all their energy into basketballs we get four basketballs and no pairs of shoes so that's four basketballs but then if they put all the energy into pairs of shoes they produce no basketballs they could produce four pairs of shoes and so it's as simple as that this output table is just showing the extremes from the production possibility curve for these countries now with the information in both the output table and these production possibility curve let's calculate the opportunity cost so let me set up another table and let me just say this is going to be our opportunity cost table OC not not Orange County opportunity costs and once again it's going to be for country a and Country B and we're gonna think about the opportunity cost of producing basketballs and that's going to be in terms of pairs of shoes and then the opportunity cost for producing pairs of shoes and that's going to be in terms of basketballs and so let me set up another table and so I encourage you once again pause this video and see if you can fill in this table what is the opportunity cost well start with what's the opportunity cost for producing basketballs in terms of shoes in country a alright well there's a couple of ways to think about it imagine a world in country where you're producing no basketballs and you're producing six pairs of shoes but then if you were to increase the number of basketballs you produce by eight so if you add eight basketballs well you're gonna give up six pairs of shoes you see that right over here you give up six pairs of shoes and so in country a eight basketballs cost six shoes let me write that down so in country a eight basketballs and I'll just say B for short cost six 6s s is shoes for short or another way to think about it if you divide both of these by eight one basketball cost six over eight shoes all I did is eight basketballs cost six shoes and one basketball it's going to cost six divided by eight pairs of shoes and so what is that going to be well 6 over 8 is the same thing as 3/4 or 3/4 of a pair of shoes so one basketball cost 3/4 of a pair of shoes or we could say that is 0.75 s where s is a pair of shoes for this is my simplified notation and what about in country B well in country B if I go from no basketballs to four basketballs then I would have given up four pairs of shoes I would have given up four pairs of shoes so in country B so in B for four basketballs cost four pairs of shoes or divide both by four you could have a basketball one basketball costs one pair of shoes so a basket so a basketball here in country B costs one pair of shoes so one pair of shoes s once again is a pair of shoes and you could have also gotten it from this information here you could set up an equation you could say look if I put all in country a if I put so let's look at this part right over here you could say in country a if I put all of my energy into basketballs I could produce eight basketballs but if I put that same energy into shoes I could produce six pairs of shoes so with the same energy I could produce either one of these and then if I want the opportunity cost for basketballs I divide both by eight and that's essentially what I did over here and I get a basketball it costs six eighths of a pair of shoes or three-fourths of a pair of shoes which is exactly what I have over here now let's do the opportunity cost for a pair of shoes in either country well there's a couple of ways to think about it you could just view as the reciprocal or you could even go back to this equation right over here if we are in country a we would say six shoes if we put all our energy and shoes we could produce six of them or six pairs of shoes I should say and if we put all of our energy into basketballs we could produce eight basketballs but if you divide by six you get per pair of shoes and so per each pair of shoes the energy to produce one pair of shoes is equivalent to the energy to produce 8/6 of a basketball and eight six is the same thing as four thirds of a basketball and if we wanted to write it as a decimal just for simplicity or maybe to make it easier to compare we would say that this is approximately one point three three obviously the threes just keep going on it repeats forever but approximately one point three three basketballs is the cost of producing a shoe and the opportunity cost of producing a shoe in country a one point three three basketballs and what about in country B well in country B we could set up a similar type of equation where the same energy for four shoes I could produce four basketballs and that's essentially what we set up right over here on the left you divide both sides by four the energy of a shoe is equal to the energy of a basketball and I should say the energy of a pair of shoes is equal to the energy of making a basketball so the opportunity cost of making a pair of shoes is equal to one basketball so now we're ready to draw the connection given the opportunity cost that we have calculated what country has the comparative advantage in basketballs pause this video and try to figure it out so now let's look at the opportunity cost of producing a basketball in either country in country a it's a each basketball costs a worker 3/4 of a pair of shoes while in country B it costs them a whole pair of shoes so country a actually has a lower opportunity cost of producing basketballs and so it has the comparative advantage here comparative comparative advantage and then if we look at shoes it goes the other way around country a has an opportunity cost of one and one-third basketballs for every pair of shoes while country B has an operating cost of only one basketball per pair of shoes so it has a lower opportunity cost and this one actually might be a little bit counterintuitive because if you look on the shoe axis right over here country a has the absolute advantage in producing shoes a worker per day in country a can produce six pairs of shoes while a worker in country B can only produce four pairs of shoes but even though country a has the absolute advantage it actually make sense for country a to focus on basketballs while country B focuses on shoes and in the next video we'll see how they can trade with each other to get to a scenario that is beyond their production possibility curve z' and why can why focusing on your comparative advantage at least in this theoretical very simplified world makes sense
AP® is a registered trademark of the College Board, which has not reviewed this resource.