Chapter 3

Chapter three addresses principles one, two, and five: people face trade-offs, the cost of something is what you give up to get it, and trade can make everyone better off. Even if two people are able to produce the same products, it may still be beneficial for both to trade their products. Person A would specialize in Product 2, and Person B would specialize in Product 1; this especially works when Person A is more efficient in producing Product 2 and Person B is more efficient in producing Product 1.This is not always the case and Person A may be more efficient in producing both Product 1 and Product 2, but trade would still benefit both due to their opportunity cost and comparative advantage. In this case, both people would find themselves leaning towards producing more of one product and trading their excess production for the other person’s excess production, finding they both have more of each than if they were self sufficient.

This same concept is then applied to two people specializing in one area, or even countries trading and benefiting from it.