1. A Parable for the Modern Economy
Two goods: meat and potatoes
Two people: rancher and farmer
If rancher produces only meat
And farmer produces only potatoes
Both gain from trade
If both rancher and farmer produce both meat and potatoes
They still gain from specialization and trade

2. The production possibilities frontier (a)1
The production possibilities frontier (a)
(a) Production Opportunities
Minutes needed to
Make 1 ounce of:
Amount produced in
8 hours
Meat
Potatoes
Farmer
Rancher
60 min/oz
20 min/oz
15 min/oz
10 min/oz
8 oz
24 oz
32 oz
48 oz
Panel (a) shows the production opportunities available to the farmer and the rancher.

3. The production possibilities frontier (b, c)1
The production possibilities frontier (b, c)
(b) The farmer’s production
possibilities frontier
(c) The rancher’s production
possibilities frontier
Meat (oz) 4 8
Meat (oz) 12 24
If there is no trade, the rancher chooses this production and consumption.
If there is no trade, the farmer chooses this production and consumption. B A
Potatoes (oz) 16 32
Potatoes (oz) 24 48
Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c) shows the combinations of meat and potatoes that the rancher can produce. Both production possibilities frontiers are derived assuming that the farmer and rancher each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier

4. The opportunity cost of meat and potatoes1
The opportunity cost of meat and potatoes
Opportunity cost of:
1 oz of Meat
1 oz of Potatoes
Farmer
Rancher
4 oz potatoes
2 oz potatoes
¼ oz meat
½ oz meat

5. Farmer’s Gains From Trade
Potatoes
Meat
No Trade
With 32 28 29 1 24 26 2 20 23 3 16 4 12 17 5 8 14 6 11 7

6. Rancher’s Gains From Trade

7. Greg’s Final Solution (text)2
Greg’s Final Solution (text)
(a) The farmer’s production
and consumption
(b) The rancher’s production
and consumption
Meat (oz) 4 8
Meat (oz) 12 24
Farmer's
production and
consumption
without trade
Rancher’s production with trade
Rancher’s production and consumption without trade
Farmer's
consumption
with trade 18 12 13 B* A* 27
Rancher’s consumption with trade B 5
Farmer's
production
with trade 17 A
Potatoes (oz) 16 32
Potatoes (oz) 24 48
Farmer and Rancher agree to trade 5 oz of Meat for 15 oz of Potatoes (3:1)
Start at corners (specialization)