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
Comparative advantage is the economic basis for
specialization and trade. If individuals and countries
specialize in producing the goods in which they have
the comparative advantage and trade for goods in
which others have the comparative advantage, both
parties will be better off.
OUTPUT METHOD
Tons produced per hour
Fish (A)
Cheese (B)
Fabio
60
25
Mr. T
45
40
For Fabio, the opportunity cost of producing fish in terms of
cheese is 60 fish = 25 cheese; therefore 1 fish = 5/12
cheese. On the other hand, 1 cheese = 12/5 fish. Similarly
we can calculate the opportunity cost information for Mr. T.
Opportunity cost information appears in the table below.
Opp cost B/A
Opp cost A/B
Fish
Cheese
Fabio
25/60 = 5/12 (or
60/25 = 12/5 (or 2.4)
0.42) cheese
fish
Mr. T
40/45 = 8/9 ( or 0.89) 45/40 = 9/8 (or 1.125)
cheese
fish
Fabio should produce fish because his opportunity cost in
terms of cheese is less that Mr. T’s opportunity cost. Mr. T
should produce cheese because his opportunity cost in
terms of fish is less that Fabio’s opportunity cost to produce
cheese. Fabio producing fish and Mr. T producing cheese
yields the most fish and cheese per hour of any combination
of production.
INPUT METHOD
Acres required to produce one bushel
Apples (A)
Pears (B)
Miley
5
2
Hannah
6
3
For the input method, the opportunity cost of producing
apples in terms of pears requires converting the input
(acres) to output. For Miley, 5 acres = 1 apple; therefore 1
acre = 1/5 apple. Also, 2 acres = 1 pear, therefore 1 acre =
½ pear. Now you can use the same method as for the
output method: 1/5 apple = ½ pear; therefore 1 apple = 5/2
pears. Likewise 1 pear = 2/5 apple.
Opportunity cost B/A Opportunity cost A/B
Apples
Pears
Miley
5/2 (2.5) pears
2/5 (0.4) apples
Hannah
6/3 (2) pears
3/6 (0.5) apples
Miley has comparative advantage in producing pears. To
produce one bushel of pears, she must give up 0.4 bushels
of apples, as opposed to 0.5 bushels of apples for Hannah.
The opportunity cost of a bushel of pears is lower for Miley
than for Hannah, so Miley should produce pears. Hannah
should produce apples because she has a lower opportunity
cost in terms of foregone bushels of pears.
Practice problems
Victoria
Akhil
Kilograms converted to jerky
Potatoes
Cabbage
100
200
120
150
Shallis
Pierce
Number clubbed to death per week
Deer
Antelope
4
6
24
12
Ford
Chuck
Norris
Number produced per hour
Cars
Pickup trucks
8
10
150
120
Hectares required to produce one ton
Coca
Poppies
Whitehead 9
3
Benson
8
2