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Chapter 2

ECON 102 Chapter Notes - Chapter 2: Absolute Advantage, Comparative Advantage, Opportunity Cost


Department
Economics
Course Code
ECON 102
Professor
Soren Lemche
Chapter
2

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2.1 Exchange + Opportunity
Cost
Generalized system-people do all their own tasks (can do everything, so self-
sufficient)
Specialized system-people do what they’re best at, trade others to satisfy desires ->
more productive
Absolute advantage-if person takes less time/resources for a task than another
person
Comparative advantage-in doing task, one has lower OC than other person
-if person A is better at fixing bikes than TVs, and person B is same as A at fixing
TVs, person A should
NOT fix their own TV (b/c could spend that time fixing bikes, which A is better at)
Example: Rick takes 20 minutes to fix TV and 10 mins to fix a bike; Beth takes 30
minutes to fix either
OC of fixing TV: Rick = fixing 2 bikes (what he gives up in that time) Beth =
fixing 1 bike
OC of fixing bike: Rick = fixing ½ TV Beth = fixing 1 TV
-Rick has absolute advantage in both areas, but comparative advantage only in
fixing a bike
-Beth has comparative advantage in fixing a TV
Generalized system: World wants 16 TVs fixed -> Rick spends half of 8 hour day on
TVs => 12 TVs + 24
bikes from Rick; Beth spends 2 hours for remaining 4 TVs, 6 hours left to get 12
bikes = 16 TVs, 36 bikes
Specialized System: Rick only fixes bikes, Beth only fixes TVs => world gets 16 TVs,
48 bikes
Productivity-units of output per hour divided by units of input per hour
-can describe information in terms of productivity
Example: Kim can fix 2 TVs/hour and fix 1 bike/hour; Bob can fix 3 TVs/hour and fix
3 bikes/hour
-Bob has greater productivity in both, so has absolute advantage in both
-Bob has comparative advantage in fixing bikes (gives up 1 TV vs. Kim’s 2
TVs)
Principle of Comparative Advantage-total output largest when each person/country
concentrates on the activities where their opportunity cost is lowest (even if one
has absolute advantage in all activities)
Sources of Comparative Advantage
Individual level: inborn talent, education, training, experience
National level: natural resources, society, culture, politics, economy, legal
institutions, accumulated human + physical (eg. technology) capital
-also, since English is widespread language, English-speaking countries have CA in
(eg. making movies)
2.2 Comparative Advantage + Production Possibilities
Production Possibilities Curve-graph, shows max amnt of one good that can be
made for every level of other good (using rule: more of one
means less of other)
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