Presentation on theme: "Should Tiger Woods Mow His Own Lawn? How can people benefit from specialization and trade?"— Presentation transcript:
Should Tiger Woods Mow His Own Lawn? How can people benefit from specialization and trade?
Tiger can mow his lawn in only two hours, but he can also make $10,000 in two hours doing appearances. ($5,000/hr) What’s his opportunity cost of mowing his lawn instead of working? Tiger has a neighbor, Forrest. It will take Forrest 4 hours to mow Tiger’s lawn. Forrest could also spend those 4 hours working at McDonald’s for $40 total ($10/hour) What’s Forrest’s opportunity cost of mowing Tiger’s lawn? Should Tiger mow his own lawn? Let’s look at it like an Economist
Absolute Advantage vs. Comparative Advantage OpportunityCost LawnWorkLawn Tiger2 hours$10,000 Forrest4 hours$40 Who has the absolute advantage in mowing lawns? Tiger (2 hours vs. 4 hours) Who has the absolute advantage in working? Tiger ($5,000/hour vs. $10/hour) Who has the comparative advantage in mowing lawns? FORREST How do you know? The person who gives up the least to mow lawns What is the most Tiger should pay? What is the least Forrest should charge? Absolute Advantage= lowest cost producer (most efficient producer ) $10,000 $40
Using Comparative Advantage OpportunityCost LawnWorkLawnWork (2 hours) Tiger2 hours$10,000 Forrest4 hours$40 Who has the lowest opportunity cost of not working for 2 hours to cut grass? FORREST People possess a …Comparative Advantage, where they.. have the lowest opportunity cost. Remember: An Opportunity Cost is what you give up in order to do something. 1 Lawn 1/2 Lawn
How ‘bout another example. OpportunityCost Production in 8 hours work MeatPotatoes1 oz. Meat1 oz. Potatoes FARMER8 oz.32 oz. RANCHER24 oz.48 oz. Who has the absolute advantage in producing meat? Rancher Who has the absolute advantage in producing potatoes? Rancher Should the rancher produce both or can they benefit from specializing and trading? First you must consider…Their opportunity costs As long as they don’t have the exact same efficiencies, someone will have a comparative advantage in each product. Farmer should produce potatoes and Rancher should produce meat 4 oz/pot. 2 oz/pot. 1/4 oz/meat 1/2 oz meat