ECON 2100 Lecture Notes - Lecture 2: Comparative Advantage, Absolute Advantage, Opportunity Cost

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Published on 29 Aug 2016
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Chapter 3- Interdependence and the Gains from Trade Continued
The Principle of Comparative Advantage- If you are productive, you are using a sale. Based on
diagrams and charts, they determine who would produce certain items more efficiently.
Absolute Advantage- The comparison among producers of a good according to their
productivity. It describes the outcome and procedure of each person/company and looks how
each is different and efficient in their own way.
Opportunity Cost and Comparative Advantage- Opportunity cost is how producers are compared
and determined on who will be the main supplier. The producer with the smaller opportunity
cost (will not give up as much of a good/service) is said to have the comparative advantage over
the other in producing a certain good or providing a certain service. For example, look at the
graph below. The Rancher has a smaller opportunity cost of 1 oz of meat because he only gives
up 2 oz. of potatoes, compared to the farmer who gives up 4 oz. of potatoes. On the other hand,
when producing potatoes, the Farmer has the smaller opportunity cost because he gives up only
a 1/4 oz. of meat for every ounce of potatoes, where the rancher gives up 1/2 an ounce of meat
for every ounce of potato. So when it comes to the opportunity cost of meat, the rancher has
the comparative advantage over the farmer. However, when it comes to the opportunity cost of
potatoes, the farmer has the comparative advantage over the rancher. NOTE: It is very possible
for two producers to have the same opportunity cost, therefore ending with no comparative
advantage.
Comparative Advantage and Trade- When potential trading parties have differences in
opportunity costs, they can each benefit from trade. This is why the whole world trades with
one another. While the U.S may produce cheese more efficiently than Greece, Greece would
rather trade with us in order to save money and time on trying to produce their own cheese.
Greece is more efficient at producing olives, so instead of the U.S wasting time and money on
trying to produce olives, we rather trade so we can obtain olives at a lower opportunity cost.
Differences in opportunity costs and comparative advantage opens up for specialized
production and trade.
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