Absolute & Comparative Advantage

1. Absolute & Comparative Advantage Microeconomics – Unit 1

2. What was the most important document written in 1776? The Wealth of Nations written by Adam Smith The Father of Economics

3. What made The Wealth of Nations “THE” most important document written in 1776? Adam Smith wrote about a pin factory. What did they call the workers in the pin factory? a bunch of pinheads

4. First observation: each worker produced own pins; total production by all workers = 2,000 pins/day Recommendation: each worker should specialize in a production stage After specialization: total production by all workers = 20,000 pins/day 5/21

5. Proof that specialization works -- Name each state’s specialization: Idaho Florida Texas Michigan Any illegal activity that you can think of Nevada

6. Adam Smith revolutionary ideas in economics: 1. That by each acting in our own self-interest, our economy is best served. 2. Specialization in production greatly increases productivity.

7. Revolutionary Idea in Economics: One country should still trade with another country even though it is a better producer of everything. David Ricardo 1772-1823 8/21

8. Absolute and Comparative Advantage Anne & Grace have a side business making bracelets. They need 10 more bracelets for a street fair tomorrow. Anne can make 10 bracelets in 2 hours and it will take Grace around 4 hours. Who should make the bracelets? Why? Absolute Advantage

9. Absolute Advantage when a particular person (entity) can produce more of a commodity using the same amount of resources.

10. But also in your analysis you need to know that Anne is a computer programmer who earns about $60/hour. Her daughter Grace works at Paradise Bakery for $8 an hour. $120 Anne – 10 bracelets in 2 hrs Grace – 10 bracelets in 4 hrs $32 So what does it cost each to make 10 bracelets?

11. Who should make the bracelets? Grace because she has a-- Comparative Advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity

12. Which is more important in economics-- absolute or comparative advantage? Comparative Advantage Take absolute advantage and KICK it out the window. absolute advantage 13/21

13. Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 Which country has the absolute advantage in the production of Maple Syrup? In Copper Wire?

14. Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 absolute advantage What do you do with Absolute Advantage?

15. Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 More importantly, which country has the Comparative Advantage in Maple Syrup? In Copper Wire? And Why? 16/21

16. Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 What does it cost U.S. to make 1 barrel of maple syrup? 5/6 spool copper wire What does it cost Canada to make 1 barrel of maple syrup? 1 1/7 spool copper wire

17. Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 What does it cost U.S. to make 1 spool of copper wire? 1 1/5 barrel of maple syrup What does it cost Canada to make 1 spool of copper wire? 7/8 barrel of maple syrup

18. cost U.S. 1 barrel of maple syrup? 5/6 spool copper wire cost U.S. 1 spool of copper wire? 1 1/5 barrel of maple syrup cost Canada 1 barrel of maple syrup? 1 1/7 spool copper wire cost Canada 1 spool of copper wire? 7/8 barrel of maple syrup

19. Comparative Advantage seeks to determine which country has the …… l m o p c lower marginal opportunity production cost

20. AP workbook p. 23-25 read these pages if you need; p. 26-27 problems 1, 2 & 3. Stop after 3. the end! 21/21