Comparative & Absolute Advantage (05/11/17)

Specialization

• Individuals and countries can be better off if the will produce in what they have a comparative advantage and then trade with others for whatever else they want/need

Absolute and Comparative Advantage

Absolute Advantage 

• The producer that can produce the most output OR requires the least amount of inputs (resources) 

• Ex: Papa John has an absolute advantage in pizzas because he can produce 100 and Ronald can only make 20. 

Comparative Advantage 

• The producer with the lowest opportunity cost. 

• Ex: Ronald has a comparative advantage in burgers because he has a lowest PER UNIT opportunity cost. 

Countries should trade if they have a relatively lower opportunity cost.

They should specialize in the good that is "cheaper" for them to produce

Distinguishing input from output problems

Example of an output problem

• An Output problem presents the data as products produced given a set of resources. (ex. Number of pens produced)
• An Input problem presents the data as amount of resources needed to produce a fixed amount of output. (ex. Number of labor hours to produce 1 bushel)
• When identifying absolute advantage, input problems change the scenario from who can produce the most to who can produce a given product with the least amount of resources