 Hi. This is Professor Gerald Friedman at the Economics Department at the University of Massachusetts at Amherst. Welcome to Microeconomics. Microeconomics is the study of individual behavior and how individual interactions lead to economic outcomes, such as the production of stuff or the distribution of things. One of the central issues in microeconomics is trade, how people exchange things with other people. Economists going back to David Ricardo in the early 19th century have talked about trade as going on according to the principle of comparative advantage. Actually, comparative advantage was first coined by an Irish economist, Robert Torrens, before Ricardo. But Ricardo is better looking, and he had a more interesting life. He died young. All these things, people credit Ricardo with all sorts of ideas, even if he borrowed them from somebody else. The idea of comparative advantage is that trade can benefit everybody, even if one party to the trade, to the exchange, is better at producing everything than the other party. Trade benefits everybody as long as each party is comparatively better at something. So let's say I'm really good at growing pot, and my TA, Manisha, is really good at growing corn. If she's really good at growing corn, then that means that the price she pays for corn, the amount of pot that she gives up to grow corn is relatively low. That's what it means to be good at growing corn. She can grow corn easily. She doesn't have to use a lot of land. She doesn't have to use a lot of labor. So she doesn't have to take a lot of land and labor away from growing pot to grow corn. The price that she pays herself in lost pot is low. What about the cost of the pot? If she's really good at growing corn, then she has to give up a lot of corn to get an ounce of pot. The acre of land that she takes away from growing corn to grow pot, it gives her whatever she gets for the pot, but she has to lose all the corn that she could have grown on that plot of land. So corn is cheap for her, therefore pot is expensive for her. I, on the other hand, I'm a stoner and useless for most things, but I'm good at growing pot. Lousy at corn. Pot's cheap for me, but if I want corn, it's really expensive. By myself, okay, I just live on pot with a little bit of corn. Monisha, God, she has a lot of popcorn. She sits there watching videos and eating popcorn, wishing that she could get stoned, but it's too expensive. She hears about me. I hear about her. I'm wishing I could have popcorn. She's wishing she could have pot. My pot's cheap for her, compared to what she has to give up. She has to give up a lot of corn to get her pot, but if she buys from me, pot's cheap. Corn's expensive for me. I have to give up a lot of pot to get some corn. I buy from her. Corn's cheap for me. We're both better off. That is the theory of comparative advantage in trade. People specialize in what they're good at. I concentrate on pot. Monisha concentrates on corn. We're both better off. We consume more than we could, just growing things on our own. We're both happier. Life is good. That's the theory of individual specialization. Note one more thing before we go. This is a theory of the social division of labor. We're both producing final products. It is not a theory of the detailed division of labor, where we each specialize on a particular little task, like tightening one bolt like Charlie Chaplin did in modern times, or teaching microeconomics and not teaching macroeconomics. That detailed division of labor may be a good idea, but it is not justified on the grounds of comparative advantage. You need a different theory for that. Later on, maybe we'll talk about those theories and why they're not true. Thank you. Enjoy the day.