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Absolute & Comparative

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michelle ashmore

on 25 August 2016

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Transcript of Absolute & Comparative

Absolute & Comparative
It is easiest to look at Absolute/Comparative advantage on a chart!
Advantage
Comparative Advantage
the ability to make a good at a
LOWER OPPORTUNITY COST than someone else
Absolute Advantage
the ability to make
MORE
of a good than someone else
so, you are looking at which one of the 2 items the person or nation should spend its time making...

which is smarter for that country/person to focus on... that's Comparative Advantage!
You are looking at the difference in the number of products each person/nation can make...

who makes more? ... that's Absolute Advantage!
because of
SCARCITY
(unlimited wants but limited resources) ... we have to make decisions on what to produce.

these choices lead to
OPPORTUNITY COST
(what we give up when making a decision).

When a person/company/nation is trying to decide between 2 products we look at a
PRODUCTION POSSIBILITIES CURVE
, but when trying to decide whether to trade, we look at


Joe
Jane
EARTH
Earth has enough resources to make toy planes and bicycles.

But it will run out of resources if it makes both...

so Earth needs to decide which it should spend time making.
a person or nation would be more likely to trade if he/she/it has COMPARATIVE advantage...
focus on one product and don't waste resources
toothbrushes
paintbrushes
Devonte
Mirra
4
2
3
6
Absolute ----
who makes more toothbrushes?
who makes more paintbrushes?

Comparative ---
which should Devonte focus on?
which should Mirra focus on?
So, will they trade???
YES! because they have Comparative Advantage in different items!
Devonte will use all his resources to make toothbrushes and Mirra will use all her resources to make paintbrushes.
NOW LETS PRACTICE!!!
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