Individuals or groups are endowed with scarce endowments. The scarcity depicted creates an avenue for trade, a beneficial exchange that economists suggest is done on rational grounds. Interdependence and exchange formulate a significant aspect of an economy, as they provide consumers with incentives for ideal consumption in more significant quantities. Subject to benefits and costs, a rational consumer is drawn to that he/she considers ideal, i.e. the benefits outweigh the costs in price terms.  Trade occurs subject to need.

The case of the roommates Pat and Kris is such that apart from spending their time conducting their studies, they engage in activities they deem favorable, i.e. the brewing of root beer and the making of pizza. Both are endowed with different input capability thus having different periods in the completion of the engagements. For Pat, it takes him 4 hours for brewing a gallon of root beer while it takes Kris 6 hours. Contrastingly, Pat takes 2 hours in making pizza while Kris takes 4 hours in the completion of the same activity. Given the time taken by Pat to make pizza is 2 hours, the same time could be used in the production of one-half gallon of root beer. The opportunity cost in this case of producing one pizza is the one-half gallon of beer. For Kris, it takes him 4 hours to make one pizza, and an equivalent time could be utilized in the production of two-thirds gallon of beer. The opportunity cost of making on pizza for the Kris is therefore two-thirds gallon of beer. The individual with the absolute advantage in the making of pizza is the folk advantaged with the use of fewer inputs, to complete the task, than the other compatriot. For the roommates, Pat has an absolute advantage in making pizza given it takes him a shorter time to finish the job compared to Kris. The comparative advantage represents the endowment subjected to one in production vis-à-vis the opportunity cost; a producer advantaged with the lower price than the other. In making pizza, Pat has a comparative advantage given the more moderate figure than that of Kris. Calculating the roommate’s production possibilities in 24 hours, beef and pizza amounts would be 6 and 12 for Pat whereas 4 and 6 for Kris respectively.

As depicted, the ideal trade would occur if Pat requires Kris to specialize in making pizza and deal with him for beer. Given the division of time equally, production and consumption for Pat will be at the point where the number of pizzas made is 6 and gallons of beer is 3, whereas for Kat is 3 and 2 respectively. The highest price that would be ideal for a tradeoff of pizza (regarding gallons of root beer) typical to make both roommates better of is 4 gallons. The focusing of Kris in the production of pizza would drive the work done to increase to 6 quantities thereby reducing beer production by 4 units. The lowest price that pizza can be traded at (regarding gallons of beer) is 2 gallons given the amount foregone by Kris sold to Pat in providing incentives for increased pizza production is 2 units.

As illuminated, trade encourages increased quantities in production and production. An ideal exchange occurs in the scenario where both agents benefit by acquiring more amounts than they would have initially. The profitable trading is subject to the opportunity costs and comparative advantage as shown in the above example. The ideology informs the choice of specialization.

 
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