1. A Tale of Two Tribes

2. Portigia Engia On an island, there lived two isolated tribes,

3. In order to survive, they needed to catch fish from the sea and collect wood from the forest. There were 20 workers in each tribe.

4. 120 units of fish 80 units of wood In one day, the workers of Engia could collect OR

5. 160 units of fish 200 units of wood In one day, the workers of Portigia could collect OR

6. Chief of Engia Chief of Portigia Initially, the chief of each tribe assigned 10 workers to collect wood and the other 10 to catch fish. All of them were satisfied with this arrangement.

7. One day, an adventurer called David arrived. He discovered these tribes.

8. ???? ???? He was surprised to find that their production arrangement was so inefficient. Based on my training in economics, I am confident that I can improve your living standard by changing the production arrangement. David Chief of Engia Chief of Portigia

9. Then he urged the chiefs to discuss this issue. David Chief of Engia Chief of Portigia

10. Based on my knowledge in economics, specialization would increase output. Trade would improve living standards. Why don't you do that? David

11. I don't think the Portigians will cooperate with our tribe because they are more superior and productive. How will they do that without any benefit? Chief of Engia

12. We can collect more wood and catch more fish than they can with the same number of workers. We may suffer if we trade with them. I can't see any reason for cooperation. Chief of Portigia

13. Chief of Engia ???? Let me tell you my plan. ???? David Chief of Portigia

14. You, the chief of Engia, should ask all your workers to catch fish and collect no wood.. Don't worry, Portigia will provide your tribe with wood if you give fish to them. No, we will die of cold if we don't have wood to burn at night. Chief of Engia David

15. Since you are more productive in both tasks, I don't advise you to do only one task. I suggest that you should send 15 workers to collect wood and 5 workers to catch fish. Also, don't worry about the fish; you can get them from Engia. I guarantee that both of you can get more fish and wood than before if you follow my suggestion. Chief of Portigia David

16. After the conversation, both chiefs still hesitated to follow David's plan. Chief of Engia Chief of Portigia

17. Can David’s plan raise the outputs of wood and fish for the two tribes in total?

18. Portigia Portigia Activity 1 1. Which tribe is better at collecting wood: Engia or Portigia? 2. Which tribe is better at catching fish: Engia or Portigia?

19. The initial situation Daily Output / goods available Wood (Units) Fish (Units) Engia and Portigia Total and Activity 1 3. Before the arrival of David 40 60 80 100 140 140

20. David’s plan Daily Output Wood (Units) Fish (Units) Engia and Portigia Total and Activity 1 4. After David’s plan is adopted 0 120 150 40 150 160

21. Activity 1 5. After they have adopted David's plan, do they have more output as a whole? How much additional wood can they collect? How much additional fish they can catch? As a whole, they can produce more. With the same amount of resources, they can collect 10 more units of wood and catch 20 more units of fish.

22. After Trade Goods Available Wood (Units) Fish (Units) Engia and Portigia Total and Activity 1 6. After trade 45 75 105 85 150 160

23. Gains from trade Wood (units) Fish (units) Engia and Portigia Activity 1 7. The gains from trade 5 15 5 5 10 20 Total and

24. Can you explain why they can produce more output with the same amount of resources?

25. Definitions • Absolute advantage: the ability to produce more units of a good or service than some other producers using the same quantity of resources. • Comparative advantage: the ability to produce a good or service at a lower opportunity cost than another producer.

26. Portigia has the absolute advantage both in collecting wood and catching fish. However, she has the comparative advantage only in collecting wood, whereas Engia has the comparative advantage in catching fish.

27. Opportunity cost of wood (a) What is the opportunity cost of producing 1 unit of wood in terms of fish in Engia? 1.5 units of fish (b) What is the opportunity cost of producing 1 unit of wood in terms of fish in Portigia? 0.8 units of fish (c) Which tribe has the comparative advantage in collecting wood? Portigia has the comparative advantage in collecting wood because she gives up less fish than Engia.

28. Opportunity cost of fish (d) What is the opportunity cost of producing 1 unit of fish in terms of wood in Engia? 0.67 units of wood (e) What is the opportunity cost of producing 1 unit of fish in terms of wood in Portigia? 1.25 units of wood (f) Which tribe has the comparative advantage in catching fish? Engia has the comparative advantage in catching fish because she gives up less wood than Portigia does.

29. Conclusion Although Portigia has the absolute advantage in both activities, she has the comparative advantage in collecting wood only. When Engia and Portigia specialize in the activity which each has the comparative advantage and trade, both are better off.