LECTURE5(2005.927) ★★ CLASS TODAY* ★ ★ ★ ★ P23-42 ★ ☆ Chapter 2: Comparative Advantage: The Basis for Exchange Slide 1
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 1 LECTURE 5 (2005.9.27) ◼ CLASS TODAY P23-42
Comparative Advantage: The Basis for Exchange MB MC CHAPTER 2
MB MC Comparative Advantage: The Basis for Exchange
Overview This chapter introduces comparative advantage and shows that having people specialize in the production in which they are relatively more efficient allows the production of more of everything. It introduces the production possibilities curve and develops the production possibilities model to show precisely how specialization enhances the productive capacity of an economy Chapter 2: Comparative Advantage: The Basis for Exchange Slide 3
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 3 Overview This chapter introduces comparative advantage and shows that having people specialize in the production in which they are relatively more efficient allows the production of more of everything. It introduces the production possibilities curve and develops the production possibilities model to show precisely how specialization enhances the productive capacity of an economy
Comparative Advantage: The Basis for Exchange a What do you think? ● Do the Nepalese perform their own services because they are poor or are they poor because they perform their own services? Chapter 2: Comparative Advantage: The Basis for Exchange Slide 4
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 4 Comparative Advantage: The Basis for Exchange ◼ What do you think? ⚫ Do the Nepalese perform their own services because they are poor or are they poor because they perform their own services?
Exchange and Opportunity Cost Should johnnie cochran write his own wi? o Cochran earns more than $1,000 per hour The cost of having a will prepared is less than $800 Chapter 2: Comparative Advantage: The Basis for Exchange Slide 5
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 5 Exchange and Opportunity Cost ◼ Should Johnnie Cochran write his own will? ⚫ Cochran earns more than $1,000 per hour ⚫ The cost of having a will prepared is less than $800
Exchange and Opportunity Cost ■Abso/ ute advantage One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person Comparative Advantage o One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other persons opportunity cost Chapter 2: Comparative Advantage: The Basis for Exchange Slide 6
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 6 Exchange and Opportunity Cost ◼ Absolute advantage ⚫ One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person ◼ Comparative Advantage ⚫ One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost
Exchange and Opportunity Cost The Principle of Comparative Advantage o Should Paula update her own web page? Time to update Time to complete web page bicycle repair Paula 20 minutes 10 minutes Beth 30 minutes 30 minutes Opportunity Cost of Opportunity Cost of a updating a web page bicycle repair Paula 2 bicycle repairs 0.5 web page updates Beth 1 bicycle repair 1 web page update Chapter 2: Comparative Advantage: The Basis for Exchange Slide 7
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 7 Exchange and Opportunity Cost ◼ The Principle of Comparative Advantage ⚫ Should Paula update her own web page? Time to update web page Time to complete bicycle repair Paula 20 minutes 10 minutes Beth 30 minutes 30 minutes Opportunity Cost of updating a web page Opportunity Cost of a bicycle repair Paula 2 bicycle repairs 0.5 web page updates Beth 1 bicycle repair 1 web page update
Exchange and Opportunity Cost If they split their time evenly and produce 16web page Web Pages Bicycle Repairs Paula 12 24 Beth 4 12 Total 16 36 If they specialized in their com parative advantage Web Pages Bicycle Repairs Paula 0 48 Beth 16 0 Total 16 48 Chapter 2: Comparative Advantage: The Basis for Exchange Slide 8
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 8 Exchange and Opportunity Cost Paula Beth Web Pages Bicycle Repairs 12 4 24 12 Total 16 36 If they split their time evenly and produce 16web page If they specialized in their comparative advantage Paula Beth Web Pages Bicycle Repairs 0 16 48 0 Total 16 48
Exchange and Opportunity Cost a Exercise 2.1 Should Barb update her own web page? Productivity in Productivity programming bicycle repair Pat 2 web page 1 repair/hr updates/hour Barb 3 web page 3 repairs/hr updates/hour OC of updating a web oC of a bicycle repair page Pat 0.5 bicycle 2 web page repalrs updates Barb 1 bicycle repair 1 web page update Chapter 2: Comparative Advantage: The Basis for Exchange Slide 9
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 9 Exchange and Opportunity Cost ◼ Exercise 2.1 Should Barb update her own web page? Productivity in programming Productivity in bicycle repair Pat 2 web page updates /hour 1 repair/hr Barb 3 web page updates / hour 3 repairs/hr OC of updating a web page OC of a bicycle repair Pat 0.5 bicycle repairs 2 web page updates Barb 1 bicycle repair 1 web page update
Exchange and Opportunity Cost a The Principle of Comparative Advantage o Everyone does best when each person(or each country) concentrates on the activities for which his or her opportunity cost is lowest Chapter 2: Comparative Advantage: The Basis for Exchange Slide 10
MB MC Chapter 2: Comparative Advantage: The Basis for Exchange Slide 10 Exchange and Opportunity Cost ◼ The Principle of Comparative Advantage ⚫ Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest
