Comparative advantage seems like a very hazy subject. Who is really going to mow people's lawns or trade wine and cameras? It didn't seem that this had real world applications. But it does!
A bunch of my friends were sitting around today watching College Football. Someone started ranting about how they had to do their bio homework and math webwork over the weekend. They had already finished the bio but not the math. Another person, who was in the same classes, said they had done the math but not the bio.
They're eyes lit up. They realized that the should help each other finish the work. While a third person said they should just give each other the work that was done and copy it - these two unknowingly economists knew that cheating was wrong, but collaboration wasn't.
Person 1 said the math took them 20 minutes and the bio would probably take them an hour. Person 2 said the bio took them 30 minutes and the math would take 45 minutes. Person 1 has the comparative advantage in bio as their bio work takes 1/3 math (while Person 2's bio is 3/2 math). Person 2 has the comparative advantage in math as their math takes 2/3 bio (person 1's math takes 3 bios).
So the two people decide to collaborate and help each other finish the work. Now Person 1 did their bio in 30 minutes and Person 2 did their math at 20 minutes by the help of their friends. The world just gained 55 minutes back through this collaboration. Time for more football!!!!!
Showing posts with label comparative advantage. Show all posts
Showing posts with label comparative advantage. Show all posts
Saturday, October 29, 2011
Class 22 - Wine and Cameras. Sounds Like a Good Class.
Today we talked more about PPF-production possibility frontier.
We looked at comparative advantage. Absolute advantage is just the ability to produce something. Comparative advantage is how much more efficient you are at producing something than someone else.
Efficiency = less tradeoffs
Comparative advantage shows that self-sufficiency is the road to poverty.
For example: There are only cameras and wine produced by Rochester and Cornell.
Rochester can make 5 cameras and 10 bottles of wine. Cornell with the same resources only makes 4 cameras and 3 bottles of wine. Rochester has the absolute advantage compared to Cornell.
So who has a lower opportunity cost? Who does it cost less for? Who has to make less tradeoffs?
So for Rochester, 1 camera = 2 wine and 1 wine = 1/2 a camera. For Cornell, 1 camera = 3/4 wine and wine = 4/3 camera.
Rochester has a comparative advantage in making wine compared to Cornell. But Cornell has a comparative advantage in making cameras compared to Rochester.
Rochester has a lower opportunity cost so it has a comparative advantage over Cornell.
Nobody can have a comparative advantage in everything!
Now let's say that Rochester had 10 wines and 0 cameras and Cornell has 0 wines and 4 cameras. Rochester gives 3 wines and Cornell gives 3 cameras. The price of exchange was 1wine/camera. Now Rochester has 7 wines and 3 cameras while Cornell has 3 wines and 1 camera. Both schools now operate outside the PPF (look at notes) so trade is sustainable and profitable.
Restricting trade is costly.
The world is richer.
We looked at comparative advantage. Absolute advantage is just the ability to produce something. Comparative advantage is how much more efficient you are at producing something than someone else.
Efficiency = less tradeoffs
Comparative advantage shows that self-sufficiency is the road to poverty.
For example: There are only cameras and wine produced by Rochester and Cornell.
Rochester can make 5 cameras and 10 bottles of wine. Cornell with the same resources only makes 4 cameras and 3 bottles of wine. Rochester has the absolute advantage compared to Cornell.
So who has a lower opportunity cost? Who does it cost less for? Who has to make less tradeoffs?
So for Rochester, 1 camera = 2 wine and 1 wine = 1/2 a camera. For Cornell, 1 camera = 3/4 wine and wine = 4/3 camera.
Rochester has a comparative advantage in making wine compared to Cornell. But Cornell has a comparative advantage in making cameras compared to Rochester.
Rochester has a lower opportunity cost so it has a comparative advantage over Cornell.
Nobody can have a comparative advantage in everything!
Now let's say that Rochester had 10 wines and 0 cameras and Cornell has 0 wines and 4 cameras. Rochester gives 3 wines and Cornell gives 3 cameras. The price of exchange was 1wine/camera. Now Rochester has 7 wines and 3 cameras while Cornell has 3 wines and 1 camera. Both schools now operate outside the PPF (look at notes) so trade is sustainable and profitable.
Restricting trade is costly.
The world is richer.
Saturday, October 22, 2011
Class 21 - Making the World Richer and PPF/PPC
Today we talked about comparative advantage.
One example is Rizzo has a huge collection of baseball cards worth $8000 but is missing one card so it is really just $1000. He has an extra card worth $200 and trades it for the needed card worth $0.02. Rizzo turned something worth $200 into $7000 while his friend turned the $0.02 card into $200. Rizzo had $1200 and his friend had $0.02. After the trade Rizzo had $8000 and his friend had $200. $1200.02 was turned into $8200 and now the world is $6999.98 richer.
Another example is in yard work. Rizzo and Rich have the same size yard. Rizzo weeds his lawn in 80 minutes and mows it in 40 minutes. His neighbor Rich weeds in 120 minutes and mows in 120 minutes. Initially Rizzo does 120 minutes of work and Rich does 240 hours or work. Rich comes up with the idea that he will weed 3/4 of Rizzo's yard if Rizzo mows Rich's lawn. Now Rich does 120+90 = 210 minutes of work while Rizzo does 20+40+40 =100 minutes of work. Both benefit and the total work is cut by 90 minutes. Rich saves more time (30 min vs 20 min) but Rizzo's time is cut by a bigger fraction (1:6 vs 1:8).
We then talked about Production Possibilities Frontier (PPF) and the Production Possibilities Curve (PPC). These operate under the ideas that all points on the line are feasible and the ones outside the line are not. It shows the absolute advantage. The PPC shows productive efficiency. The slop shows that we must make tradeoffs between goods. You can see the law of diminishing returns from the lines. And economic growth comes from increasing resources, discovery/technology, and trade.
One example is Rizzo has a huge collection of baseball cards worth $8000 but is missing one card so it is really just $1000. He has an extra card worth $200 and trades it for the needed card worth $0.02. Rizzo turned something worth $200 into $7000 while his friend turned the $0.02 card into $200. Rizzo had $1200 and his friend had $0.02. After the trade Rizzo had $8000 and his friend had $200. $1200.02 was turned into $8200 and now the world is $6999.98 richer.
Another example is in yard work. Rizzo and Rich have the same size yard. Rizzo weeds his lawn in 80 minutes and mows it in 40 minutes. His neighbor Rich weeds in 120 minutes and mows in 120 minutes. Initially Rizzo does 120 minutes of work and Rich does 240 hours or work. Rich comes up with the idea that he will weed 3/4 of Rizzo's yard if Rizzo mows Rich's lawn. Now Rich does 120+90 = 210 minutes of work while Rizzo does 20+40+40 =100 minutes of work. Both benefit and the total work is cut by 90 minutes. Rich saves more time (30 min vs 20 min) but Rizzo's time is cut by a bigger fraction (1:6 vs 1:8).
We then talked about Production Possibilities Frontier (PPF) and the Production Possibilities Curve (PPC). These operate under the ideas that all points on the line are feasible and the ones outside the line are not. It shows the absolute advantage. The PPC shows productive efficiency. The slop shows that we must make tradeoffs between goods. You can see the law of diminishing returns from the lines. And economic growth comes from increasing resources, discovery/technology, and trade.
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