Opportunity Costs, Absolute Advantage and Comparative Advantage Abstract This work defines and illustrates examples of opportunity cost. It also defines and compares comparative and absolute advantage. Then, the work extends the narrative to compare these terms in today’s society. Opportunity Costs, Absolute Advantage and Comparative Advantage Example 1: | Potatoes| Chickens| Michelle| 200| 50| James| 80| 40| * What is Michelle’s opportunity cost of producing potatoes? (1 / 200) x 50 = 0. 25 Chickens 200 Potatoes = 50 Chickens 1 Potato = 1/200 x 50=0.
25 ChickensOpportunity Costs= 0. 25 Chickens * What is Michelle’s opportunity cost of producing chickens? (1 / 50) x 200 = 4 Potatoes 50 Chickens = 200 Potatoes 1 Chicken = 1/50 x 200= 4 Potatoes Opportunity Costs= 4 Potatoes * What is James’ opportunity cost of producing potatoes? (1 / 80) x 40 = 0. 5 Chicken 80 Potatoes = 40 Chickens 1 Potato = 1/80 x 40= 0. 5 Chickens Opportunity Costs= .
5 Chickens * What is James’ opportunity cost of producing chickens? (1 / 40) x 80 = 2 Potatoes 40 Chickens = 80 Potatoes 1 Chicken = 1/40 x 80 = 2 Potatoes Opportunity Costs= 2 Potatoes Which person has an absolute advantage in which activities? * Michelle has an absolute advantage as she produces both more chickens and potatoes. * Which person has a comparative?* James has a comparative advantage to produce chickens because his opportunity costs are lower than Michelle. But Michelle has a comparative advantage to produce potatoes because she has a lower comparative advantage to James. * Suppose that they are thinking of each specializing completely in the area in which they have a comparative advantage, and then trading at a rate of 2. pounds of potatoes for 1 chicken, would they each be better off? Explain.
James would specialize in Chickens. 1 Chicken = 2. 5 Potato Trade 80/2. 25 Potatoes = 36 Chickens Michelle would specialize in Potatoes 1 Chicken = 2. 5 Potato Trade 200/2. 25 Potatoes = 88 Chickens * Michelle would be better off in the trade because she has more potatoes to trade to chickens; additionally she specializes in potatoes so the supply should continue to be a higher supply than James. * To extend the above narrative into the business world I can specifically apply this concept of outsourcing jobs overseas.
The labor can be produced cheaper overseas but we lose U. S. jobs in opportunity costs. “In return, those countries buy more of our higher-value goods made by skilled workers — for which the U.
S. has a comparative advantage. ” (Bernstein, A. ) . References Bernstein, A. (December 6, 2004) Shaking Up Trade Theory Business Week, Retrieved from website: http://www. businessweek.
com/magazine/content/04_49/b3911408. htm Mankiw, Gregory N. (2009) Principles of Economics (5th Edition) Mason, OH South-Western Cengage Learning