1. Absolute & Comparative Advantage
Unit 1 Day 4
AP Micro
Rixie

2. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.
Adam Smith, The Wealth of Nations (1776)

3. Specialization
Using resources to concentrate production on one or a small number of goods and services
Example: the United States specializes in making pharmaceuticals, while China specializes in making iPhones. Each nation will likely benefit from trading for the other item, rather than producing both themselves.

4. Advantages in Production
Absolute Advantage:
The ability of an individual or group to produce a particular good at a lower cost than another individual/group
Fewer resources are used to produce the same amount of goods

5. If New Zealand can produce 50 sweater vests in one hour, and Australia and produce 85 in two hours, which country has the absolute advantage?

6. If it takes Drake 8 hours of work to produce two tracks on his new album, and it takes Adele 3 hours to produce one, who has the absolute advantage?

7. Recordings edited per hour
Songs written per hour
Drake 3 12
Adele 2 4
Who has the absolute advantage in editing recordings?
Drake
Writing songs?
Does this mean Drake should produce both tasks himself? Why would he want to collaborate with Adele?

8. Advantages in Production
Comparative Advantage:
The ability of an individual or group to produce a particular good at a lower opportunity cost than another individual/group
This principle allows economies to gain through trade
We have to calculate per unit opportunity cost

9. Two Types of Comparative Advantage Problems
Input problem:
Given data based on resources being put into production (amount of time, land, or other resources)
Ex: How many minutes it takes a country to produce 1 iPhone
Output problem:
Given data based on the final goods produced with a given set of resources
Ex: How many iPhones a country could produce in one hour

10. Recordings edited per hour
Songs written per hour
Drake 3 12
Adele 2 4
Based on the data given, is this an output or an input problem?
Output!

11. What is Drake’s OC of editing one recording?
Opportunity cost of editing one recording
Opportunity cost of writing one song
Drake
3 recordings (one hour) = 12 songs
1 recording = 4 songs
12 song (one hour) = 3 recordings
1 song = ¼ recording
Adele
2 recordings (one hour) = 4 songs
1 recording = 2 songs
4 songs (one hour) = 2 recordings
1 song = ½ recording.
What is Drake’s OC of editing one recording?
He gives up writing four songs
What is Adele’s OC of editing one recording?
She gives up writing two songs
Adele has the lower opportunity cost for editing recordings. She should therefore edit while Drake writes the songs