Household Chores
(Output per hour)
Dishwashing
Sweeping
(Number of sink loads)
(Number of trash loads)
Betsy
2
3
Bert
1
1
•
The Parents’ Plan: Do both jobs together, sharing the work. It
will help them get along better.
•
Betsy’s Plan: Divide the tasks and work separately. She does
the dishes and Bert sweeps the garage.
•
Bert’s Plan: Betsy should do all the work. She is a faster worker
and he doesn’t want to get in her way.
•
Friend’s Plan: Each person should work on what task they do
best
•
Friend’s Plan: Each person should work on what task
they do best – SPECIALIZE!!
Absolute advantage – the
ability to produce more units of a good
or service than some other producer
using the same quantity of resources
Comparative advantage- the
ability to produce a good or service at a
lower opportunity cost than another
producer
• Natural resources, human capital, and
physical capital are unevenly distributed
from country to country. Because
countries differ so much in resources,
they also differ in their ability to produce
different goods and services. They will
specialize in certain products that they
can produce most efficiently.
• For example, coffee is grown more
efficiently in warm areas like Central
America than in other parts of the
world. Because countries cannot
efficiently produce everything their
citizens need and want, they engage
in trade.
• A person or nation has absolute advantage
when it can produce more of a given product
using a given amount of resources.
• For example, suppose that two of your friends,
Ricky Bobby and Dorothy Ann, want to make
some extra money. They decide to print designs
on T-shirts and make birdhouses.
T-Shirts per hour
Birdhouses per hour
Dorothy Ann
6
2
Ricky Bobby
1
1
• As shown in the chart, Dorothy Ann can either print six T-shirts per
hour or make two birdhouses per hour. Ricky Bobby can print one
T-shirt or make one birdhouse per hour.
• In other words, Dorothy Ann is more productive than Ricky Bobby in
making both T-shirts and birdhouses.
• In economic terms, Dorothy Ann has an absolute advantage over
Ricky Bobby in producing both goods.
• Suppose that each person is initially self-sufficient, they produce
their own goods.
Because Dorothy Ann enjoys absolute advantage in both goods,
should she remain self-sufficient?
Would she be better off if she specialized in either T-shirts or
birdhouses?
What should Ricky Bobby produce – T-shirts, birdhouse, or
both?
• Countries have to face the same sorts of questions as individuals.
Should a wealthy nation with many resources be self-sufficient, or
should it specialize in a few products and trade for the goods it
doesn’t produce?
• Comparative advantage is the ability of
one person or nation to produce a good
at a lower opportunity cost than that of
another person or nation.
 Opportunity cost – the most desirable
alternative given up as the result of a
decision.
HTTPS://WWW.YOUTUBE.COM/WATCH?V=TMLS
V9CSK0O
•
•
The law of comparative advantage states
that nations are better off when they
produce goods and services they have a
comparative advantage in supplying. The
money nations make from selling those
goods and services can be used to buy the
goods and services they cannot produce as
efficiently.
http://www.youtube.com/watch?v=U12yZX
BmQmY
• To determine comparative advantage in the example involving
Ricky Bobby and Dorothy Ann, you need to look at the
opportunity costs of producing T-shirts and birdhouses.
oDA’s opportunity costs: In an hour, DA can make either six Tshirts or two birdhouses. She therefore sacrifices three Tshirts fro every birdhouse she produces. In other words, the
opportunity cost of a birdhouse is the three T-shirts she could
have produced instead. Conversely, the opportunity cost of a
T-shirt is one-third of a birdhouse.
oRBs opportunity costs: RB sacrifices only one T-shirt for every
birdhouse. His opportunity cost for a birdhouse is the one Tshirt that he could have produced instead.
• Each person should produce the good for which he or she has a
comparative advantage- that is, a lower opportunity cost than the other
person.
Opportunity Cost of a T-shirt
Opportunity Cost of a birdhouse
Dorothy Ann
1/3 birdhouse
3 T-shirts
Ricky Bobby
1 birdhouse
1 T-shirt
• Why is it sensible for Ricky Bobby to specialize in birdhouses?
DA has an absolute advantage in making birdhouses, but RB has a comparative
advantage in birdhouses because he has a lower opportunity cost.
DA has to give up three T-shirts in order to make one birdhouse. RB only has to
give up one T-shirt.
Benefits from Specialization and Trade for Ricky Bobby and Dorothy Ann
Ricky Bobby
Dorothy Ann
Specialization
Trade
Gain from
Specialization
Specialization
Trade
Gain from
Specialization
RB specializes,
switching 2
hours from Tshirt
production to
birdhouse
production.
RB trades
1
birdhouse
for 2 Tshirts
Gain is the
same number
of T-shirts plus
1 more
birdhouse
DA
specializes,
switching one
half-hour from
birdhouse
production to
T-shirt
production.
DA trades
2 T-shirts
for 1
birdhouse.
Gain is the
same number
of birdhouses
and 1 more Tshirt.
http://www.youtube.com/watch?v=0hK9p8BSDMM
EXIT TICKET
• __________________ distribution of resources among nations
leads countries to ________________ in products that require the
use of their available resources. Countries may then
________________ with other countries for the products that they
cannot produce.
• Comparative advantage : ________________________________ :
: absolute advantage : _____________________________________ .