ECON-101 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost
2 Mar 2016
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Consider how everyone can benefit when people trade with one another. Learn the meaning of absolute advantage and comparative advantage. See how comparative advantage explains the gains from trade. Apply the theory of comparative advantage to everyday life and national policy. Assumptions: 2 goods (meat (m) & potatoes (p)), lr (8 hours), 2 participants (farmer, rancher) The reason why the rancher convinced the farmer to trade with him, even though he, the rancher, has absolute advantage is producing both (meat and potatoes) is because of opportunity cost. (pg. The comparison among producers of a good according to their productivity. What is productivity: amount of goods and services that can be produced in one hour. *trade is not based on absolute advantage if it were the case the rancher would not trade. The comparison among producers of goods according to their opportunity costs.
