Lecture%203%20Gains%20from%20Trade - ACE 455 International...

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ACE 455: International Trade in Food and Agriculture Lecture 3: Comparative Advantage and Gains from Trade Prof. Madhu Khanna Dept. of Agricultural and Consumer Economics University of Illinois, Urbana- Champaign
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Constant Cost PPF At every point on the PPF, the opportunity cost of producing another unit of a good is the same. Implies that (opportunity) cost of producing a good is the same irrespective of the quantity that is produced. Constant opportunity costs arise when (1) resources or factors of production are perfect substitutes for each other or used in fixed proportion in the production of both commodities (2) all units of the same factor are homogeneous or have the same quality.
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Supply with Constant Cost PPF Maximum Production Levels Opportunity Cost US UK US UK C 4 3 C 12/4 1 W 12 3 W 4/12 1 At a relative price of wheat of 1/3, the US would be willing to produce up to 12 W. Each unit of wheat costs 1/3, therefore this part of the supply curve will be a horizontal line upto 12 W After the first 12 units, the next 3 units of Wheat can be produced in UK but at a cost of 1.
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Pw/ Pc 2 1.6 1.3 1 2/3 1/3 0 3 6 9 12 15 18 21 Q W World Supply Curve for Wheat S UK+US Maximum Production Levels Opportunity Cost US UK US UK C 4 3 C 3 1 W 12 3 W 1/3 1
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