Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 12.2 
The pre trade situation is given by point A where the PPF 
and the price line happen to be tangent to each other. A different 
exchange rate between two commodities following trade is shown 
by a new price line. The point of tangency between the PPF and 
new price line will indicate the post trade distribution of production. 

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So far we have not talked about consumption separately. In 
the absence of trade consumption is restricted by domestic 
production. That is why point A represents both production and 
consumption before trade. Once trade opens up consumption can 
take place at a point different from the production equilibrium point. 
Information about domestic consumption can be had from the 
community indifference curve. The point of tangency between price 
line and community indifference curve will show the pattern of 
equilibrium consumption. U.S.A. is consuming more wine than she 
is producing, which means it has to be imported. Her cloth 
production exceeds domestic demand showing that it is being 
exported. 
Check your Progress: 
1. What do you understand by the concept international trade? 
2. Distinguish between Absolute Cost Advantage and 
Comparative Cost advantage. 
 
 
 
 
 
 
 
 
 
12.3 THEORY OF OPPORTUNITY COST 
Should I go to work today? Should I go to college after high 
school? Should the government spend money on a new weapon 
system? These are decisions that are made everyday; however, 
what is the cost of our decisions? What is the cost of going to work, 
or the decision not to go to work? What is the cost of college, or not 
to go to college? Finally what is the cost of buying that weapon 
system, or the cost of not buying that weapon? In economics it is 
called opportunity cost.