Absolute & Comparative Advantage Spring Semester 2019 Stater

Quick Review: What is opportunity cost?

Absolute Advantage The ability to create a product more efficiently than another producer

How to Calculate Efficiency Efficiency = amount produced resources used

Who has the absolute advantage? Production of Sandwiches Number of Employees Payton’s Pantry 40 sandwiches / hour 10 Simon’s Snacks 60 sandwiches / hour

Comparative Advantage The ability to produce goods with a lower opportunity cost than another producer

Who has the comparative advantage? Production of Tacos Production of Burritos Payton’s Pantry 3 / hour 9 / hour Simon’s Snacks 12 / hour Payton’s Pantry 1 taco = ___ burritos 1 burrito = ___ tacos Simon’s Snacks

Specialization Limiting the kind of goods and services produced Chosen based on absolute and comparative advantage

Producers… Gain an absolute advantage by specializing in what can be made most efficiently Gain a comparative advantage by specializing in the product with the lowest opportunity cost

How this helps producers: Creates savings through specialization Allows profit- maximization

How this helps consumers: More goods to choose from Get products at a lower price (passed on from producers’ savings)

Analyzing Graphs

Practice Sam and KC both work in a tax office. Both workers use the same number of resources to do their jobs. Who has the absolute advantage in tax returns? Who has the absolute advantage in sales calls?

Practice Who has the comparative advantage in tax returns? Who has the comparative advantage in sales calls?