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15. Principles of Economics (Brief Edition)_2e (2)

Chapter 2: Comparative Advantage.1. Explain and apply the Principle of Comparative. Advantage.2. Explain and apply the Principle of Increasing. Opportunity Cost.3. Identify the factors that shift the menu of. production possibilities.4. Explain and apply the role of comparative. advantage in international trade.5. Describe why some jobs are more vulnerable to. outsourcing than others.McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.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. 2­2 The Principle of Comparative. Advantage. 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• 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 2­3 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. Opportunity Cost Web Update Bike Repair. Beth 2 repairs 0.5 update. Paula 1 repair 1 update. 2­4Comparative Advantage Example.Hourly Output Web Update Bike Repair.Beth 3 updates 6 repairs.Paula 2 updates 2 repairs.Hourly Output Web Update Bike Repair.Beth 3 updates 6 repairs.Paula 2 updates 2 repairs. • 16 web updates are ordered. – Beth spends half her time at each activity: 12. updates and 24 repairs. – Paula produces 4 updates and 12 repairs. – Total output 16 updates and 36 repairs. • Specialization produces 16 updates and 48 repairs. – 12 more repairs for the same inputs!. 2­5 Production Possibilities Curve.• A production possibilities curve illustrates the. combinations of two goods that can be produced. with given resources. 24 A Unattainable.• Definitions: Combination. Coffee (lb/day). – Unattainable point 16. B. Inefficient. – Attainable point Combination. • Inefficient point. 8 C. • Efficient point.• Scarcity Principle D. 4 8 12. – Give up one good to get Nuts (lb/day). another. 2­6Susans Production Possibilities.• Two goods: coffee and nuts. – Work 6 hours per day. A.• 1 hour of labor 24. Coffee (lb/day). = 4 pounds of coffee OR.