Comparative and absolute advantage.

Warm-up Should a country produce everything it wants? Why or Why not? If Country A is better than Country B at producing everything, would Country A gain anything by trading with Country B?   When a new home is built, why doesn't one person do the carpentry, electrical, plumbing and landscaping? Warm-up

Opportunity Cost The value of the next best alternative Opportunity Cost The value of the next best alternative. For example, the opportunity cost of studying on Friday night might be missing your high school team's football game. Comparative Advantage The ability to produce something at a lower opportunity cost than other producers. Law of Comparative Advantage An individual, firm, region or country with the lowest opportunity cost of producing a good should specialize in that good. Absolute Advantage The ability to produce something using fewer resources than other producers. Terms to remember

Assume LeBron is both a great basketball player and a great lawn mower Assume LeBron is both a great basketball player and a great lawn mower. However, LeBron has a young neighbor named Scotty who is willing to mow his lawn. Lebron james scenario

LeBron can mow his lawn in two hours LeBron can mow his lawn in two hours. He could also film a Nike commercial in two hours and make $10,000. So, James' opportunity cost of mowing his lawn is $10,000. Neighbor Scotty can mow LeBron's lawn in four hours. He could also work at McDonald's for four hours and make $8 per hour. So, Scotty's opportunity cost of mowing LeBron's lawn is $32. Who has an absolute advantage in mowing the lawn? LeBron James-- he can do it in less time. So, James is better at mowing grass than Scotty. Lebron James scenario

Who has comparative advantage in mowing the lawn? Scotty-- he can do it at a lower opportunity cost ($32 versus $10,000). From this example, we can see that LeBron James is better than Scotty at mowing grass. Would LeBron benefit from a trade? Yes, as long as James pays Scotty more than $32 to mow his grass they both benefit from the trade. Lebron james scenario

Why do we specialize?? 1. We generally don't grow our own food. 2. Factories often use assembly lines. 3. Basketball or football players often specialize in one position as opposed to playing all of them. 4. Your teacher may teach economics, history, and government but likely does not also teach physical education and chemistry. Why do we specialize??

Quiz time!!