Absolute & Comparative Advantage Materials: Scratch piece of paper for everyone in the class Microeconomics – Unit 1

The Father of Economics What was the most important document written in 1776? The Wealth of Nations written by Adam Smith Walk around the room asking students the answer to this question on the scratch piece of paper—What was the most important document written in 1776? If the students DO NOT know the answer, have them make something up. Collect the answers and read some of them out loud. If some of them wrote the Declaration of Independence, tell them they are right that it WAS written in 1776, but that was NOT the question. The question was—What was THE MOST important document written in 1776? Click on the answer—The Wealth of Nations, written by Adam Smith, who is considered to be The Father of Economics. Tell the students he is also related to you. He is your great, great, great, great, great grandfather on your mother’s side. Your mother’s maiden name is Smith. The Father of Economics

What made The Wealth of Nations “THE” most important document written in 1776? Adam Smith wrote about a pin factory. What did they call the workers in the pin factory? This slide starts to explain what The Wealth of Nations was about. a bunch of pinheads

each worker produced own pins; total production by all workers = First observation: each worker produced own pins; total production by all workers = 2,000 pins/day Recommendation: each worker should specialize in a production stage Here is what Adam Smith wrote about specialization in The Wealth of Nations. First observation: each worker produced own pens. By the end of the day, the total production by the workers was 2,000 pins. He stated that each worker should specialize in the production stage rather than produce his or her own pins. Through specialization, the total output by the factory increased to 20,000 pins per day. After specialization: total production by all workers = 20,000 pins/day 5/21

Idaho Florida Texas Michigan Nevada Proof that specialization works -- Name each state’s specialization: Idaho Florida Texas Michigan On this slide, click so a state shows. Then ask the students what that state specializes in. When you are finished, ask the students why they don’t grow oranges in Alaska? I will be willing to bet you a buck, the one student will say that they CAN”T grow oranges in Alaska. You say, I will bet you a MILLION dollars I can grow oranges in Alaska. Can you grow oranges in Alaska? Yes. It just COSTS more. So why are oranges grown in Florida? Because it is cheaper. Any illegal activity that you can think of Nevada

Adam Smith revolutionary ideas in economics: 1. That by each acting in our own self-interest, our economy is best served. 2. Specialization in production greatly increases productivity.

David Ricardo Revolutionary Idea in Economics: One country should still trade with another country even though it is a better producer of everything. David Ricardo 1772-1823 8/21

Absolute Advantage Absolute and Comparative Advantage Anne & Grace have a side business making bracelets. They need 10 more bracelets for a street fair tomorrow. Anne can make 10 bracelets in 2 hours and it will take Grace around 4 hours. Who should make the bracelets? On the next eight slides, you will be giving the students an relatively easy question relating to absolute and comparative advantage. Just click each slide and have the students answer each question. Why? Absolute Advantage

Absolute Advantage when a particular person (entity) can produce more of a commodity using the same amount of resources.

But also in your analysis you need to know that Anne is a computer programmer who earns about $60/hour. Her daughter Grace works at Paradise Bakery for $8 an hour.                                                              $120 Anne – 10 bracelets in 2 hrs Grace – 10 bracelets in 4 hrs $32 So what does it cost each to make 10 bracelets?

Comparative Advantage Who should make the bracelets? Grace because she has a-- Comparative Advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY PRODUCTION COST than another entity

Comparative Advantage Which is more important in economics-- absolute or comparative advantage? Comparative Advantage Take absolute advantage and KICK it out the window. absolute advantage 13/21

Which country has the absolute Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 Which country has the absolute advantage in the production of Maple Syrup? In Copper Wire? The next four slides are another example of absolute and comparative advantage. When the students are done writing this in their notebooks, (click) ask them which country has the absolute advantage in the production of Maple Syrup? In Copper Wire? The U.S. has the absolute advantage in Maple Syrup because it can produce Maple Syrup ABSOLUTELY faster than Canada can (5-man hours compared to 8 in Canada). Which country has the absolute advantage in the production of copper wire? The U.S. has the absolute advantage in the production of copper wire because it can produce Copper Wire ABSOLUTELY faster than Canada can (6-man hours compared to 7 for Canada). Does this mean that the U.S. should produce ALL the Maple Syrup and ALL the Copper Wire and the Canadians should just hang out? (click to next slide)

What do you do with Absolute Advantage? Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 absolute advantage What do you do with Absolute Advantage?

More importantly, which country has the Comparative Advantage in Maple Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 More importantly, which country has the Comparative Advantage in Maple Syrup? In Copper Wire? And Why? More important is Comparative Advantage. Now which country should produce the Maple Syrup and which country should produce the Copper Wire? The correct answer is the U.S. should produce the Maple Syrup and Canada should produce the Copper Wire. (Some students will say the opposite because Maple Syrup is produced in Canada. Tell them this isn’t reality—this is economics). Click on next slide. 16/21

Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 What does it cost U.S. to make 1 barrel of maple syrup? 5/6 spool copper wire What does it cost Canada to make 1 barrel of maple syrup? 1 1/7 spool copper wire

Labor hours required U.S. Canada Maple Syrup 5 8 Copper Wire 6 7 What does it cost U.S. to make 1 spool of copper wire? 1 1/5 barrel of maple syrup What does it cost Canada to make 1 spool of copper wire? 7/8 barrel of maple syrup

cost U.S. 1 barrel of maple syrup? 5/6 spool copper wire cost U.S. 1 spool of copper wire? 1 1/5 barrel of maple syrup cost Canada 1 barrel of maple syrup? 1 1/7 spool copper wire Re cap of data do you notice anything about the data? the numbers are reciprocals; they always will be; so which country should produce maple syrup? (click) US b/c US has lower marginal opportunity production cost in the production of maple syrup so which country should produce copper wire? (click) Canada b/c has has lower marginal opportunity production cost in the production of copper wire cost Canada 1 spool of copper wire? 7/8 barrel of maple syrup

Comparative Advantage seeks to determine which country has the …… l m o p c lower marginal opportunity production cost

read these pages if you need; AP workbook p. 23-25 read these pages if you need; p. 26-27 problems 1, 2 & 3. Stop after 3. the end! 21/21