1. Comparative Advantage
Lesson Plan 35 Presentation 1
Comparative Advantage
It’s all about Opportunity Cost !!!
Berrien RESA1Economics in Marketing Education

2. Lesson Plan 35 Presentation 1
Let’s say you are a lawyer
Berrien RESA1Economics in Marketing Education

3. Lesson Plan 35 Presentation 1
You (the lawyer) can type 100 words a minute
An assistant you may hire can type 80 words a minute
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Who has the ABSOLUTE ADVANTAGE ??
So, who should type the reports?
Berrien RESA1Economics in Marketing Education

4. Comparative Advantage
Why should the assistant, who does not type as fast, be the one doing the reports?
Considering the lawyer makes 10x as much money as the assistant, the lawyer’s time would be better spent preparing legal briefs or being in court.
The lawyer’s opportunity cost of typing reports is high
The assistant has a
Comparative Advantage

5. Comparative Advantage
Let’s explore this theory on a national level…..

6. Lesson Plan 35 Presentation 1
Country A
Country B
1 ton
2 tons
1 ton
3 tons
The Opportunity Cost of producing 1 ton of bananas is 2 tons of sugar (2/1)
The Opportunity Cost of producing 1 ton of bananas is 3 tons of flour (3/1)
Let’s look at each country’s opportunity cost of producing bananas
Country A has a Comparative Advantage in producing bananas
Lower Opportunity Cost
Berrien RESA1Economics in Marketing Education

7. Country B has a Comparative Advantage in producing sugar
Country A
Country B
1 ton
2 tons
1 ton
3 tons
The Opportunity Cost of producing 2 tons of flour is 1 ton of bananas (1/2)
The Opportunity Cost of producing 3 tons of flour is 1 ton of bananas (1/3)
Country B has a Comparative Advantage in producing sugar
Now let’s look at each country’s opportunity cost of producing flour
Lower Opportunity Cost

8. They should trade for their shortages (BOTH WIN)
Country A
Country B
1 ton
2 tons
1 ton
3 tons
Country A should focus its resources on producing bananas (at a lower price)
Country B should focus its resources on producing flour (at a lower price)
They should trade for their shortages (BOTH WIN)

9. Comparative Advantage
Another way to look at it…..

10. Lesson Plan 35 Presentation 1
Australia
Philippines 6M 1M 2M 1M
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Should the Philippines produce both wheat and coal since it has an absolute advantage in both?
Absolute Advantage
Berrien RESA1Economics in Marketing Education

11. Who has the comparative advantage for wheat?
Philippines
Australia
Who has the comparative advantage for wheat?
The Philippines would give up 2 tons of coal for every 6 bales of wheat they produce
Australia would give up 1 ton of coal for every 1 bale of wheat they produce
2/6 = 1/3
1/1 = 1
Lower Opportunity Cost

12. Who has the comparative advantage for coal?
Philippines
Australia
Who has the comparative advantage for coal?
The Philippines would give up 6 bales of wheat for every 2 tons of coal they produce
Australia would give up 1 bale of wheat for every 1 ton of coal produce
6/2 = 3
1/1 = 1
Lower Opportunity Cost

13. Philippines
What if the Philippines focused on their comparative advantage (wheat)? 9M 6M 2M
If the Philippines did not produce coal, they could become even more efficient at making wheat. Perhaps they can now produce 9M bales of wheat

14. What if Australia focused on their comparative advantage (coal)?
If Australia did not produce wheat, they could become even more efficient at producing coal. Perhaps they can now produce 4M tons of coal

15. Australia
Philippines 7M 9M 2M 4M 2M 2M
The Philippines can now trade 2M bales of wheat to Australia for 2M tons of cotton
BOTH end up with more goods because they focused on efficiencies in production and traded for what they were less efficient