ECON 1 Lecture Notes - Lecture 3: Opportunity Cost, Absolute Advantage, Comparative Advantage
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Opportunity cost pertains to how people make decisions in economics between two endeavors. Quick review: ricardo"s island (a simplified scenario that explains the economic principle of specialization) People on the island only eat fish sandwiches. A fish sandwich requires 1 unit of bread and 1 unit of fish. Everybody on the island can work for a total of 20 hours a day. The rich family takes 1 hour to produce 1 fish, and 1. 5 hours to produce 1 bread. The poor family takes 3 hours for 1 fish, and 2 hours for 1 bread. Given the equation bread per fish= (bread productivity)/(fish productivity), mr poor gains 3/2 bread for each fish, while ms rich only gains bread per each fish. Mr poor should produce more bread than fish (specialize in baking) because he has a comparative advantage in that regard. Ms rich has an absolute advantage since she is better at producing both bread and fish overall.
