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The benefits of specialization are the reason a person typically focuses on the produc-
tion of only one type of good or service. It takes many years of study and experience to
become a doctor; it also takes many years of study and experience to become a commercial
airline pilot. Many doctors might have the potential to become excellent pilots, and vice
versa, but it is very unlikely that anyone who decided to pursue both careers would be as
good a pilot or as good a doctor as someone who specialized in only one of those profes-
sions. So it is to everyone’s advantage when individuals specialize in their career choices.
Markets are what allow a doctor and a pilot to specialize in their respective fields.
Because markets for commercial flights and for doctors’ services exist, a doctor is
assured to find a flight and a pilot is assured to find a doctor. As long as individuals
know they can find the goods and services they want in the market, they are willing to
forgo self-sufficiency and specialize instead.

Comparative Advantage and

Gains from Trade

The production possibilities curve model is particularly useful for illustrating gains
from trade — trade based on comparative advantage. Let’s stick with Alexis being stranded
on her island, but now we’ll suppose that a second castaway, Jacob, has washed ashore.
Can Alexis and Jacob benefit from trading with each other?
It’s obvious that there will be potential gains from trade if the two castaways do
Roderick Chen/Getty Images different things particularly well. For example, if Alexis is a skilled fisher and Jacob is
very good at climbing trees, clearly it makes sense for Alexis to catch fish and Jacob to
gather coconuts — and for both castaways to trade the products of their efforts.
But one of the most important insights in all of economics is that there are gains
from trade even if one of the trading parties isn’t especially good at anything. Suppose,
for example, that Jacob is less well suited to primitive life than Alexis; he’s not nearly as
good at catching fish, and compared to Alexis, even his coconut gathering leaves some-
thing to be desired. Nonetheless, what we’ll see is that both Alexis and Jacob can live
better by trading with each other than either could alone.
For the purposes of this example, let’s go back to the simple case of straight-line
production possibilities curves. Alexis’s production possibilities are represented by
the production possibilities curve in panel (a) of Figure 1.3-1, which is the same as

FIGURE 1.3-1 Production Possibilities for Two Castaways

(a) Alexis’s Production Possibilities (b) Jacob’s Production Possibilities
Quantity Quantity
of coconuts For each sh Alexis loses of coconuts
30 3/4 of a coconut
1 3 For each sh Jacob loses
− 2 coconuts
4
20 1
−2

Alexis's Jacob's
PPC PPC
0 40 0 10
Quantity of sh Quantity of sh

Here, each of the two castaways has a constant opportunity cost of Alexis’s case, each fish has an opportunity cost of ¾ of a coconut.
fish, and therefore a straight-line production possibilities curve. In In Jacob’s case, each fish has an opportunity cost of 2 coconuts.

20 Macro • Unit 1 Basic Economic Concepts
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

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