Opportunity Costs, Absolute Advantage and Comparative Advantage
Opportunity Costs, Absolute Advantage and Comparative Advantage
Abstract
This work defines and illustrates examples of opportunity cost. It also defines and compares comparative and absolute advantage. Then, the work extends the narrative to compare these terms in today’s society.
Opportunity Costs, Absolute Advantage and Comparative Advantage
Example 1: | Potatoes | Chickens | Michelle | 200 | 50 | James | 80 | 40 | * What is Michelle’s opportunity cost of producing potatoes? (1 / 200) x 50 = 0.25 Chickens
200 Potatoes = 50 Chickens
1 Potato = 1/200 x 50=0.25 Chickens
Opportunity Costs= 0.25 Chickens * What is Michelle’s opportunity cost of producing chickens? (1 / 50) x 200 = 4 Potatoes
50 Chickens = 200 Potatoes
1 Chicken = 1/50 x 200= 4 Potatoes
Opportunity Costs= 4 Potatoes * What is James’ opportunity cost of producing potatoes? (1 / 80) x 40 = 0.5 Chicken
80 Potatoes = 40 Chickens
1 Potato = 1/80 x 40= 0.5 Chickens
Opportunity Costs= .5 Chickens * What is James’ opportunity cost of producing chickens? (1 / 40) x 80 = 2 Potatoes
40 Chickens = 80 Potatoes
1 Chicken = 1/40 x 80 = 2 Potatoes
Opportunity Costs= 2 Potatoes * Which person has an absolute advantage in which activities? * Michelle has an absolute advantage as she produces both more chickens and potatoes. * Which person has a comparative? * James has a comparative advantage to produce chickens because his opportunity costs are lower than Michelle. But Michelle has a comparative advantage to produce potatoes because she has a lower comparative advantage to James. * Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
James would specialize in Chickens.
1 Chicken = 2.5 Potato
Trade 80/2.25 Potatoes = 36 Chickens
Michelle would specialize in
Abstract
This work defines and illustrates examples of opportunity cost. It also defines and compares comparative and absolute advantage. Then, the work extends the narrative to compare these terms in today’s society.
Opportunity Costs, Absolute Advantage and Comparative Advantage
Example 1: | Potatoes | Chickens | Michelle | 200 | 50 | James | 80 | 40 | * What is Michelle’s opportunity cost of producing potatoes? (1 / 200) x 50 = 0.25 Chickens
200 Potatoes = 50 Chickens
1 Potato = 1/200 x 50=0.25 Chickens
Opportunity Costs= 0.25 Chickens * What is Michelle’s opportunity cost of producing chickens? (1 / 50) x 200 = 4 Potatoes
50 Chickens = 200 Potatoes
1 Chicken = 1/50 x 200= 4 Potatoes
Opportunity Costs= 4 Potatoes * What is James’ opportunity cost of producing potatoes? (1 / 80) x 40 = 0.5 Chicken
80 Potatoes = 40 Chickens
1 Potato = 1/80 x 40= 0.5 Chickens
Opportunity Costs= .5 Chickens * What is James’ opportunity cost of producing chickens? (1 / 40) x 80 = 2 Potatoes
40 Chickens = 80 Potatoes
1 Chicken = 1/40 x 80 = 2 Potatoes
Opportunity Costs= 2 Potatoes * Which person has an absolute advantage in which activities? * Michelle has an absolute advantage as she produces both more chickens and potatoes. * Which person has a comparative? * James has a comparative advantage to produce chickens because his opportunity costs are lower than Michelle. But Michelle has a comparative advantage to produce potatoes because she has a lower comparative advantage to James. * Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2.5 pounds of potatoes for 1 chicken, would they each be better off? Explain.
James would specialize in Chickens.
1 Chicken = 2.5 Potato
Trade 80/2.25 Potatoes = 36 Chickens
Michelle would specialize in
References: Bernstein, A. (December 6, 2004) Shaking Up Trade Theory Business Week, Retrieved from website: http://www.businessweek.com/magazine/content/04_49/b3911408.htm Mankiw, Gregory N. (2009) Principles of Economics (5th Edition) Mason, OH South-Western Cengage Learning