Should Tiger Woods Mow His
Own Lawn?
How can people benefit from
specialization and trade?
Let’s look at it like an Economist
Tiger can mow his lawn in only two hours,
but he can also make $10,000 in two hours
doing appearances. ($5,000/hr)
What’s his opportunity cost of
mowing his lawn instead of working?
Tiger has a neighbor, Forrest.
It will take Forrest 4 hours to mow
Tiger’s lawn. Forrest could also spend
those 4 hours working at McDonald’s
for $40 total ($10/hour)
What’s Forrest’s opportunity cost
of mowing Tiger’s lawn?
Should Tiger mow his own lawn?
Absolute Advantage vs. Comparative Advantage
Absolute Advantage= lowest cost producer (most efficient producer)
Opportunity
Lawn
Work
Tiger
2 hours
$10,000
$10,000
Forrest
4 hours
$40
$40
Cost
Lawn
Who has the absolute advantage in mowing lawns?
Tiger (2 hours vs. 4 hours)
Who has the absolute advantage in working?
Tiger ($5,000/hour vs. $10/hour)
Who has the comparative advantage in mowing lawns?
FORREST
How do you know?
The person who gives up the least to mow lawns
What is the most Tiger should pay?
What is the least Forrest should charge?
Using Comparative Advantage
People possess a …Comparative Advantage, where they..
have the lowest opportunity cost.
Remember: An Opportunity Cost is what you give up in order to do
something.
Opportunity
Cost
Work (2 hours)
Lawn
Work
Lawn
Tiger
2 hours
$10,000
$10,000
1 Lawn
Forrest
4 hours
$40
$40
1/2 Lawn
Who has the lowest opportunity cost of not working for 2 hours
to cut grass?
FORREST
How ‘bout another example.
Opportunity
Cost
Production in
8 hours work
Meat
Potatoes
1 oz. Meat
1 oz. Potatoes
FARMER
8 oz.
32 oz.
4 oz/pot.
1/4 oz/meat
RANCHER
24 oz.
48 oz.
2 oz/pot.
1/2 oz meat
Who has the absolute advantage in producing meat?
Rancher
Who has the absolute advantage in producing potatoes?
Rancher
Should the rancher produce both or can they benefit from specializing
and trading?
First you must consider…Their opportunity costs
As long as they don’t have the exact same efficiencies, someone will
have a comparative advantage in each product.
Farmer should produce potatoes and Rancher should produce meat