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Lecture Principles of economics - Chapter 2: Comparative advantage

This chapter introduces two Core Principles (Comparative Advantage and Increasing Opportunity Cost) to show how specialization and trade increase the production and consumption of all goods. Further, the chapter sets up the production possibilities curve and then uses it to show precisely how specialization enhances the productive capacity of an economy. | Comparative Advantage Chapter 2 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Explain and apply the Principle of Comparative Advantage Explain and apply the Principle of Increasing Opportunity Cost (also called the Low-Hanging-Fruit Principle) Identify factors that shift the menu of production possibilities Explain and apply the role of comparative advantage in international trade and describe why some jobs are more vulnerable to outsourcing than others 2 Exchange and Opportunity Cost Joe Jamail, a highly successful trial attorney, employs another attorney to write his will Writing your own will Opportunity cost of 2 hours Hiring someone to spend 4 hours on your will Making the right economic choice Do It Yourself only when Opportunity cost < hired cost 2 hours $10,000+ $3,200 Priceless 3 Exchange and Opportunity Cost A person has an absolute advantage at a particular task if he or she can perform the task in fewer . | Comparative Advantage Chapter 2 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Explain and apply the Principle of Comparative Advantage Explain and apply the Principle of Increasing Opportunity Cost (also called the Low-Hanging-Fruit Principle) Identify factors that shift the menu of production possibilities Explain and apply the role of comparative advantage in international trade and describe why some jobs are more vulnerable to outsourcing than others 2 Exchange and Opportunity Cost Joe Jamail, a highly successful trial attorney, employs another attorney to write his will Writing your own will Opportunity cost of 2 hours Hiring someone to spend 4 hours on your will Making the right economic choice Do It Yourself only when Opportunity cost < hired cost 2 hours $10,000+ $3,200 Priceless 3 Exchange and Opportunity Cost A person has an absolute advantage at a particular task if he or she can perform the task in fewer hours than the other person A person has a comparative advantage at a particular task if his or her opportunity cost of performing the task is lower than the other person’s opportunity cost 4 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 the lowest. The Principle of Comparative Advantage 5 The Principle of Comparative Advantage Two parties have different opportunity costs for two activities Concentrate on the activities for which you have the lowest opportunity cost Total value of output increases with specialization and trade 6 Comparative Advantage Example Production Times Web Update Bike Repair Beth 20 minutes 10 minutes Paula 30 minutes 30 minutes Paula and Beth can each update web pages and repair bikes Beth has an absolute advantage in both Comparative advantage drives specialization 7 Comparative Advantage Example Production Times Web Update Bike Repair Beth 20 .