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Absolute & Comparative
Transcript of Absolute & Comparative
It is easiest to look at Absolute/Comparative advantage on a chart!
the ability to make a good at a
LOWER OPPORTUNITY COST than someone else
the ability to make
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!
(unlimited wants but limited resources) ... we have to make decisions on what to produce.
these choices lead to
(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
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
who makes more toothbrushes?
who makes more paintbrushes?
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!!!