Two players produce and consume two goods. A trading period allows them to find mutually beneficial trades.
Key Learning Objectives:
- Opportunity Cost Differences Lead to Gains from Trade: Trade allows an uncoupling of production and consumption. As long as there is a difference in opportunity cost, then there are trades that simultaneously benefit both players. Importantly, this holds even if one has an absolute advantage in both goods.
- The Linear Production Model: With total inputs fixed, the linear production model highlights the concept of opportunity cost, i.e., how many fries could I have made with the time I now devote to producing an extra burger. This allows clear distinction between having an absolute advantage (requiring less time to produce a burger) and comparative advantage (needing to give up fewer fries in order to produce a burger).
- Main Courses: microeconomics; macroeconomics
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