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Lecture 5

ECON 1BB3 Lecture Notes - Lecture 5: Opportunity Cost, Comparative Advantage


Department
Economics
Course Code
ECON 1BB3
Professor
Bridget O' Shaughnessy
Lecture
5

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Should you and your roommate divide the household
chores evenly? 9/17/2012 6:25:00 AM
Example 1: There are 2 interior decorators who can paint and wallpaper.
They have a 40hour workweeks. Martha can paint 20 rooms or wallpaper
5 rooms, Stewart can paint 10 rooms or wallpaper 8 rooms.
Martha Stewart
Paint Paint
20
10
5 Wallpaper Wallpaper 8
# done in 40 hours
Paint
Wallpaper
Martha
20
5
Stewart
10
8
# hours needs to do 1 room
Paint
Wallpaper
Martha
2
8
Stewart
4
5
Opportunity Cost: Whatever must be given up to obtain some item (eg.
Going to university instead of working)
Next best alternative use of those dollars
# done in 40 hours
Paint
Wallpaper
Martha
20
5
Stewart
10
8
Opportunity cost of 1 room
Paint
Wallpaper
Martha
¼
4
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Stewart
4/5
5/4
Sentence Method for finding opportunity cost:
M’s opportunity cost for 20 painted rooms is 5 wallpapered rooms
M’s opportunity cost of 1 painted room is ¼ wallpapered room
Absolute Advantage: The ability to produce a good with a smaller
quantity of inputs
Comparative Advantage: The ability to produce a good with a smaller
opportunity cost
Can’t have comparative advantage in both goods
If Martha was exactly twice as good as Stewart, then NOBODY has
a comparative advantage
o Same opportunity cost, neither is better off be trade
Comparative advantage reflects the relative opportunity cost
Example 2: Martha can paint 20 rooms or wallpaper 5 rooms, Stewart can
paint 10 rooms or wallpaper 4 rooms
Martha Stewart
# done in 40 hours
Paint
Wallpaper
Martha
20
5
Stewart
10
4
# hours needs to do 1 room
Paint
Wallpaper
Martha
2
8
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