1. Basic Economic Concepts
Comparative Advantage and Opportunity Costs
Purpose: Examine the relationship between specialization and decision-making.
Standard: Benchmark 1.3 and 1.4

2. Goals
Define specialization and explain why it is important that we have individuals specialize.
Explain comparative advantage.
Calculate opportunity cost with given quantities and determine comparative advantage.

3. I. Comparative Advantage
Specialization:
When individuals or companies concentrate their productive efforts on a limited number of activities for which they have the lowest opportunity cost for.
Allows for a larger total quantity of goods to be produced and for a more efficient use of resources.
Also allows for a variety of goods to be produced

4. I. Comparative Advantage
The ability to produce a good more efficiently or at a lower cost than someone else.
Law of Comparative Advantage:
If it is cheaper to buy or trade for a good or service rather than producing it yourself, then you should.
Absolute Advantage
The ability to produce more a good regardless of cost.

5. II. Calculating Comparative Advantage
The Slope
= (y2 – y1)/
( x2 – x1)
Opportunity Cost = ∆Y production/ ∆ X production
The opportunity cost of the good on the y-axis is always the inverse of the slope of the PPC.
Pizzas (x)
Bulldozers (y)
200
160 20
120 40 80 60
100
The opportunity cost of the good graphed on the x-axis is always the slope of the PPC.

6. 1.
Farmer X has the absolute advantage in the production of apples, but not in the production of oranges.
Farmer Y has the absolute advantage in the production of apples, but not in the production of oranges.
Farmer X has the absolute advantage in the production of both oranges and apples.
Farmer X has the absolute advantage in the production of oranges, but not in the production of apples.
Farmer Y has the absolute advantage in the production of both oranges and apples.
Apples
Oranges
Farmer X 50 10
Farmer Y 80 40
Which of the following statements is true according to the table above? E

7. 2.
Both farmers can gain from trade because Farmer X has the comparative advantage in the production of apples while Farmer Y has the comparative advantage in the production of oranges.
Both farmers can gain from trade because Farmer Y has the comparative advantage in the production of apples while Farmer X has the comparative advantage in the production of oranges.
Both farmers can gain from trade because Farmer Y has the absolute advantage in the production of oranges while Farmer X has the absolute advantage in the production of apples.
Both farmers can gain from trade because Farmer X has the absolute advantage in the production of oranges while Farmer Y has the absolute advantage in the production of apples.
Neither farmer can gain from trade because neither farmer has the comparative advantage in the production of either good.
Apples
Oranges
Farmer X 50 10
Farmer Y 80 40
Based on the table above, which of the followings statements is true? A