Download - D S Comparative Advantage: The Basis for Exchange Comparative Advantage: The Basis for Exchange 2
D S
Comparative Advantage:The Basis for Exchange
Comparative Advantage:The Basis for Exchange
2. 2.
CA 2
Comparative Advantage: The Basis for Exchange
What Do You Think?Do the Nepalese perform their
own services because they are poor or are they poor because they perform their own services?
Confucius said:”………..
CA 3
Exchange and Opportunity Cost
Should Johnnie Cochran write his own will?Cochran earns more than $1,000 per hourThe cost of having a will prepared is less
than $800
CA 4
The Concept of Opportunity Cost
Opportunity cost of any choice What we forego when we make that
choice Most accurate and complete concept of cost Direct money cost of a choice may only be a
part of opportunity cost of that choice Opportunity cost of a choice includes both
explicit costs and implicit costs Explicit cost—dollars actually paid out for a choice Implicit cost—value of something sacrificed when no direct
payment is made
CA 5
Opportunity Cost and Society
All production carries an opportunity costTo produce more of one thingMust shift resources away from
producing something else
CA 6
Absolute Advantage
One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person
CA 7
Comparative Advantage
One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost
CA 8
eXchange
How if both sides are equivalent in opportunity cost ?
CA 9
Supergirl Paula has Absolute Advantage in everything.
Should Paula update her own web page?
Time to updateTime to updateweb pageweb page
Time to complete Time to complete bicycle repairbicycle repair
PaulaPaula 20 minutes20 minutes 10 minutes10 minutes
BethBeth 30 minutes30 minutes 30 minutes30 minutes
CA 10
The Principle of Comparative Advantage
Should Paula update her own web page?Or do something else?
Opportunity Cost of Opportunity Cost of updating a web pageupdating a web page
Opportunity Cost of a Opportunity Cost of a bicycle repairbicycle repair
PaulaPaula 2 bicycle repairs2 bicycle repairs 0.5 web page updates0.5 web page updates
BethBeth 1 bicycle repair1 bicycle repair 1 web page update1 web page update
CA 11
Assume: Fixed endowment
How many web pages and bicycle repairs can Paula and Beth produce a day if they both work eight-hour days?
CA 12
If they split their time evenly ,and produce 16 web pages
+ 36 bicycle repairs
PaulaPaula
BethBeth
Web PagesWeb Pages Bicycle RepairsBicycle Repairs
1212
442424
1212
TotalTotal 1616 3636
36361616
Time to updateTime to updateweb pageweb page
Time to complete Time to complete bicycle repairbicycle repair
PaulaPaula 20 minutes20 minutes 10 minutes10 minutes
BethBeth 30 minutes30 minutes 30 minutes30 minutes
CA 13
Specialization and Division of Labor
If they specialized in their comparative advantage
PaulaPaula
BethBeth
Web PagesWeb Pages Bicycle RepairsBicycle Repairs
00
16164848
00
TotalTotal 1616 4848
1616 4848
CA 14
Question
Should Barb update her own web page?
Productivity in Productivity in programmingprogramming
Productivity inProductivity in
bicycle repairbicycle repair
PatPat 2 web page 2 web page updates per hourupdates per hour
1 repair/hr1 repair/hr
BarbBarb 3 web page 3 web page updates per hourupdates per hour
3 repairs/hr3 repairs/hr
CA 15
Exchange and Opportunity Cost
Everyone does best when each person (or each country)
concentrates on the activities for which his or her opportunity cost is lowest
CA 16
Application
Where have all the .400 hitters gone?
CA 17
Sources of Comparative Advantage
Individual Inborn talent Education Training Experience
CA 18
Sources of Comparative Advantage
National Level Natural resources Cultural institutions
CA 19
Question
Televisions and videocassette recorders were developed and first produced in the United States.
Why did the United States fail to retain its lead in these markets?
CA 20
1927 Bell lab TV demo
CA 21
Why Sony’s CLIE failed?
We do one thingRight and very well!
CA 22
Production Possibilities Frontiers (PPF)
Curve showing all combinations of two goods that can be produced with resources and technology available
Society’s choices are limited to points on or inside the PPF
CA 23
Comparative Advantage and Production Possibilities
The Production Possibilities CurveA graph that describes the maximum
amount of one good that can be produced for every possible level of production of another good.
CA 24
Comparative Advantage and Production Possibilities
The Production Possibilities CurveAssumeA small economy thatProduces only two goods
- coffee and nutsHas only one worker who
works 6 hrs/day
CA 25
Susan’s Production Possibilities
0
Coffee(lb/day)
Nuts(lb/day)
Opportunity Cost (OC)1. OC nuts = Loss in
coffee/gain in nuts
2. OC coffee = Loss in nuts/gain in coffee
16
8
4 8
24
Production Possibilities Curve: Allcombinations of coffee and nuts that
can be produced with labor
A
B
C
D
12
CA 26
Susan’s Production PossibilitiesThe scarcity principle: tradeoffHaving more of one good generally means having less of another good.
Coffee(lb/day)
Nuts(lb/day)
A
B
C
D
24
0
16
8
4 8 12
CA 27
Susan’s Attainable and Efficient Points on Production Possibilities
Nuts(lb/day)
A
B
Combination F: Unattainable
C
Combination E: Inefficient
D
Combinations A, B, C, and D: Efficient
Coffee(lb/day)
24
0
16
8
4 8 12
CA 28
The Production Possibilities CurveAttainable Point
Any combination of goods that can be produced using currently available resources
Unattainable PointAny combination that cannot be produced using
currently available resources
CA 29
The Production Possibilities CurveEfficient Point
Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other
CA 30
The Production Possibilities CurveInefficient Point
Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other
CA 31
Tom’s Production Possibilities
0
Nuts(lb/day)
How Individual Productivity Affects the Slope and Position of the Production Possibilities Curve
Tom’s Production Possibilities Curve for a 6 hour day
Coffee(lb/day)
4
8
8 16
A
B
C
D
12Tom’s Production Possibilities Curve: All combinations of coffee and nuts that can be produced with Tom’s labor
24
CA 32
Individual Production Possibilities Curves Compared
Nuts(lb/day)0
12
24
Tom’s Production Possibilities Curve
Tom has an absolute and comparative advantage in
picking nuts
24
12
Susan’s Production Possibilities Curve
Susan has an absolute and comparative advantage in picking coffee
Coffee(lb/day)
CA 33
Production Without Specialization
Nuts(lb/day)0
12
24
12 24
Susan’s Production Possibilities Curve
Assume: Susan and Tom allocate their time so each person’s output is half nuts and half coffee
Tom’s Output = 2 hrs picking nuts = 8 lbs 4 hrs picking coffee = 8 lbs
Susan’s Output = 2 hrs picking coffee = 8 lbs4 hrs picking nuts = 8 lbs
Total Output = 16 lbs each
8
8
BTom’s Production Possibilities Curve
Coffee(lb/day)
CA 34
Production With Specialization
Nuts(lb/day)0
12
24
12 24
Susan’s Production Possibilities Curve
Tom’s comparative advantage is in nuts so he specializes in nuts and produces 24 lbs
Susan’s comparative advantage is in coffee so she specializes in coffee and produces 24 lbs
Susan gives Tom 12 lbs of coffee for 12 lbs of nuts
E
Tom’s Production Possibilities Curve
Coffee(lb/day)
CA 35
The gains from specialization grow larger as the difference in opportunity cost increasesFor Example
Susan: 5 lb coffee/hr 1lb nuts/hr
Tom: 1 lb nuts/hr 5 lb coffee/hr
Gains from specialization
The gains from specialization grow larger as the difference in opportunity cost increases
Without SpecializationTom: 5 hrs coffee = 5 lb 1 hr nuts = 5 lb
Susan: 1 hr coffee = 5 lb 5 hrs nuts = 5 lb
Total: 10 lb 10 lb
CA 37
The gains from specialization grow larger as the difference in opportunity cost increases
With SpecializationTom: 30 lb coffee 0 lb nuts
Susan: 0 lb coffee 30 lb nuts
Total: 30 lb 30 lb
CA 38
Production PossibilitiesCurve For a Large Economy
Nuts(1000s of lb/day)
Assume: An economy that produces only two goods, coffee and nuts
100
80
Why would the Production Possibilities Curve have
an outward bow?
Coffee(1000s of lb/day)
E
AB
C
D
1520
9095
20 30 75
77
CA 39
Lives SavedNumber of
Quantityof All
Other Goods
100,000 200,000 300,000 400,000 500,000
1,000,000950,000
850,000
700,000
500,000
400,000 W
Figure : The Production Possibilities Frontier
At point A,all resourcesare used for"other goods." Moving from point
A to point B requiresshifting resourcesout of other goodsand into health care.
At point F,all resourcesare used forhealth care.
BA
C
D
E
F
CA 40
Increasing Opportunity Cost
According to law of increasing opportunity cost (成本遞增法則 )
Or called Law of Diminishing returnsThe more of something we produceThe greater the opportunity cost of
producing even more of it This principle applies to all of society’s
production choices
CA 41
The Search for a Free Lunch
Productive Inefficiency More of at least one good can be produced
Without pulling resources from the production of any other good
No industry, firm or economy is ever 100% productively efficient However, cases of gross inefficiency are
not as common as you might think
CA 42
The Principle of Increasing Opportunity Cost (“The Low-Hanging-Fruit Principle”)In expanding the production of any good,
first employ those resources with the lowest opportunity costs, and only afterward turn to resources with higher opportunity costs
Ricardo’s 地租論
Comparative Advantage & Production Possibilities
CA 43
Economic Growth: An Outward Shift in the Economy’s PPC
Coffee(1000s of lb/day)
Nuts(1000s of lb/day)
Original PPC
New PPC
Factors Shifting the PPC1. Increases in productive resources
(i.e., labor or capital)
2. Improvements in knowledge and technology
CA 44
Discovery of oil
Cost downward Shift out of
PPF
CA 45
Factors That Shift The Economy’s Production Possibilities Curve
Increasing Productive ResourcesInvestment in new factories and equipment Population growth
Improvements in Knowledge and TechnologyIncreasing educationGains from specialization
CA 46
Barrier to specialize
Why have countries Like Nepal been So slow to specialize?Low population densityIsolation
Some factors that may limit specializa-tion LawsCustoms
CA 47
Discussion
Can we have too much specialization?
What do you think?What are the costs of specialization? Taylorism & Fordism All-clerk
CA 48
International Trade Question
If trade between nations is so beneficial, why are free-trade agreements so controversial?
WTO
D S
The EndThe EndThe EndThe End