Comparative advantage and specialization Sec. 2.3

Comparative Advantage Ex) You have chores: wash two family cars and mow the lawn. Wash car: 45 min./car Mow: 1 hour Total work: 2 ½ hours David, your neighbor, has the same chores. Wash car: 1 hr./car Mow: 3 hrs. Total work: 5 hours

Absolute advantage Being able to produce something using fewer resources than other producers require. Ex) You have an absolute advantage b/c you can do each task using fewer resources. The resource here is your labor time. Your total work: 2 ½ hours David’s total work: 5 hours

Vocab: Law of comparative advantage- the worker with the lower opportunity cost of producing a particular output should specialize in that output. Specialization- occurs when individual workers focus on single tasks, enabling each worker to become more efficient and productive.

Question: What is your opportunity cost of washing each car? In the 45 minutes/car, you could mow ¾ of the lawn. So, your opportunity cost of washing a car would be mowing ¾ of the lawn. In the hour David takes to wash a car, he could instead mow 1/3 of the lawn. So, David’s opportunity cost of washing a car is mowing 1/3 of the lawn.

Cont. Because your opportunity cost of washing a car is mowing ¾ of the lawn and David’s is 1/3, he, David, faces the lower opportunity cost of washing cars. Again, the law of comparative advantage says that the person with the lower opportunity cost should specialize in producing that output. In this example, David should specialize in washing cars. And you should specialize in mowing lawns.

Cont. If each of your specialize, it cuts down your total work time. David washes cars for four hours. Cuts time down by an hour You mow lawns for two hours. Cuts time down by 30 minutes

vocab Barter- products are directly traded for other products Division of Labor- organizes the production process so that each worker specializes in a separate task. Money- coins, bills, and checking accounts The one thing that everyone is willing to accept in exchange for goods and services

Division of Labor https://www.youtube.com/watch?v=Meo0s54s1sw

Specialization and Division of Labor When people specialize, they must exchange what they produce for other goods they desire. These exchanges are easier when carried out through the use of money. A division of labor results in greater efficiency because workers become more skilled in their tasks, lose no time switching between tasks, and are able to use more sophisticated production techniques.

Production Possibilities Frontier Production possibilities frontier (curve)- shows the possible combinations of two types of goods that can be produced when available resources are employed efficiently. Efficiently- producing the maximum possible output from available resources.

PPF Points along the curve between A and F identify possible combinations of the two goods that can be produced when the economy’s resources are used efficiently. Points inside the curve are inefficient. Points outside the curve are unattainable. Any movement along the PPF involves producing less of one good in order to produce more of the other.

Shifts of the PPF When the resources available to an economy change, the PPF shifts. If more resources become available, the PPF shifts outward. (more output can produced) A PPF will shift outward if more or better resources become available, technology improves, or a change in the rules of the game boosts production incentives. If there is a decrease in available resources, the PPF shifts inward.

Videos https://www.youtube.com/watch?v=O6XL__2CDPU https://www.youtube.com/watch?v=FwPiWz1a1Tw https://www.youtube.com/watch?v=tW4G5IPpzFY