FMSC 290 Lecture Notes - Lecture 9: Absolute Advantage, Comparative Advantage, Opportunity Cost
1 May 2018
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Lecture February 20th, 2018
• absolute advantage vs. comparative advantage
• using comparative advantage is the best thing one can do in life
o do not use absolute advantage as criteria for assigning jobs
• lowest cost possible is what you want- lowest trade-off
• comparative advantage: who has the lowest opportunity cost for the person
• the average income of families is higher than single people
o why? In a marriage, people are computing comparative advantage, they are working
jointly
• one person
o can have absolute advantage in both goods
o cannot have comparative advantage in both goods
• for different opportunity costs
o one person has comparative advantage in one good
o the other person has comparative advantage in the other good
• read chapter 3- family as economic unit PowerPoint on ELMS
• the basic ideas of trade
o Adam Smith- father of modern economics
• Terms of trade: the number of units of goods received (demanded or imported) for each
unit of the supplied (exported) goods. This is also known as the price of export to price of
import.
• Economics gives you the power of knowing how to predict prices
• When people make decisions together, they reach a mutually beneficial region of trade
• Difference between linear line and curved line on possibilities front graph- there is more
cost, it is exponential, the cost is not linear
find more resources at oneclass.com
find more resources at oneclass.com
