1. Absolute & Comparative Advantage
Unit 1
AP Micro
Stater

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)
Setting aside the dated language, what does Smith mean by this?

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 (in other words, more efficiently) than another individual/group
Fewer resources are used to produce the same amount of goods, OR more of the good is produced using the same amount of resources

5. If New Zealand can produce 50 sweater vests in one hour, and Australia can 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 track, who has the absolute advantage?
Side note: Remember to hold “other things equal,” so we’ll assume the tracks are of the same length and quality

7. Pairs of pants produced per hour Sweaters produced per hour
Australia 3 12
New Zealand 2 4
Who has the absolute advantage in pants production?
Australia, because it can produce more pants in one hour than New Zealand
Sweater production?
Australia, because it can produce more sweaters in one hour than New Zealand
Does this mean Australia should produce both products itself? Why would it want to work together (trade) with New Zealand?

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 (comparing one task to another)
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 (often a set time limit)
Ex: How many iPhones a country could produce in one hour

10. Pairs of pants produced per hour Sweaters produced per hour
Australia 3 12
New Zealand 2 4
Based on the data given, is this an output or an input problem?
Output!
We will practice this problem in class together.