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Resource categories
Land natural resources limited in quantity
Labor-Human power
Capital-created resources
Entrepreneurial talent-business skills
Comparative Advantage
Relative Ability to produce at less cost
Based upon Opportunity Cost (whats given
up)
Reason for trade
Reason for specialization
3
U.S.
Ag Mfg
0 1000
80 800
160 600
240 400
320 200
400
0
Canada
Ag Mfg
0 400
60 320
120 240
180 160
240
80
300
0
Mex
Ag Mfg
0 100
40
80
80
60
120
40
160
20
200
0
4 (3 lines)
Plot each box of options on the Graph Below
(0,1000)
800
United States
PPC
(80,800)
Canada
Mexico
Manufacturing
600
Canada
PPC
400
200
0
0
Mexico
PPC
100
200
300
400
500
Agriculture
600
700
5
800
900
Opportunity Cost
Calculations
What is the opportunity cost of ag goods in each
country?
Mexico
Who has lowest op cost (P)of Ag ________
Who has comparative advantage (low cost) in
manufacturing?__________
US
Hence who should produce what if some of each is
desired?
Either
US________
Mexico _______
Canada ______
Mfg
Ag
6
US
Can
ada
1000
800
Manufacturing
600
400
200
0
0
100
200
300
400
500
Agriculture
600
700
800
900
Book Example
Numbers changed to make Clearer
30
Shirley 24 C
Tom 24 N
25
Susan 24c/12n
Shirley
Tom 6c/24n
Specialized
20
No Specialization
Poorly specialized
15
10
Each produces
proportional
share
Shirley 12N
Tom 6 C
-4
11
16
21
26
31
36
Production Possibilities
Curve
Unattainable
Milk
X
Efficiency
Gets you to
The PPC.
Reallocation
Moves you along.
Efficient
X
X
X
Inefficient
X
Computers
Changes in Technology
Energy solutions will affect productivity
Productivity up
Natural occurrences
Disasters Colorado fires
Weather Hurricane Isaak
Discovery of oil
BP Oil Spill
11
Application of Comparative
Advantage
Sell/Export what you have a comparative advantage
in
Buy/Import goods you have a comparative
disadvantage in
Should you grow your own food?
Should you do your own ?
Answer: It depends on opportunity cost
Includes non-monetary elements
Con