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Understanding Comparative Advantage Through David Ricardo's Economics

This lesson explores comparative advantage, a key concept in economics introduced by David Ricardo. We illustrate the principle with a fun example featuring Ricky Ricardo and his Cuban-American husband having a party. By examining their ability to bake cakes and make pizzas, we analyze absolute versus comparative advantage. The concept shows that even if one party is more efficient at both tasks, specializing according to comparative advantage minimizes opportunity costs, leading to overall better production outcomes.

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Understanding Comparative Advantage Through David Ricardo's Economics

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Presentation Transcript

  1. Mr. Gerdes’AP Macroeconomics Comparative Advantage

  2. Ricky Ricardo • Lucy’s Cuban-American husband drumming on the bongo.

  3. David Ricardo • English economist responsible for promoting comparative advantage as the basis of trade. No relation to Ricky Ricardo.

  4. Absolute Advantage v. Comparative Advantage • Absolute Advantage • Faster, more, more efficient • Comparative Advantage • Lower opportunity cost

  5. Specialization • Producing according to comparative advantage

  6. Example • Assume David Ricardo and Ricky Ricardo are going to throw a party in exactly one hour. They decide on serving homemade pizzas and cakes. Assume they have like 15 ovens in their apartment and lots of pots and pans. Use the information in the next slide to determine who should produce what.

  7. Example

  8. Example Who has the absolute advantage in baking cakes? Who has the absolute advantage in making pizza?

  9. Example Why? Well, because 4 cakes>2 cakes & 8 pizzas>6 pizzas.

  10. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

  11. Example Who has the comparative advantage in baking cakes? Who has the comparative advantage in making pizza?

  12. Example Why? Ricky only gives up 2 pizzas in order to bake a cake, whereas David gives up 3 pizzas in order to bake a cake.

  13. Example Furthermore, it only cost David 1/3of a cake to make a pizza, whereas it costs Ricky ½ of a cake to make a pizza.

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