So it's going to be a fixed opportunity cost for one product relative to the other, at any point along this production possibilities frontier. Who has a comparative advantage in cups? What is a Comparative Advantage? And let's think about her opportunity cost for producing a plate. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. This is a foundational concept in economics that is used to model international trade and the competitiveness of nations. And I'm going to fix the price here. All Signalling and Countersignalling Explore or Exploit? Let's call her Patty. If Patty focused all of her time on cups she could produce 10 cups in a day and if she focused all of her time on plates, she could produce 30 plates in a day. Comparative advantage helps the countries to decide which goods they should produce and drive the trade. So he's going to specialize in cups, and Patty, for the same reason, is going to specialize in plates. Let's now move away from the world of the hunter-gatherer and into the dinnerware market. That's fair enough. This course is an introduction to the microeconomic theory of markets: why we have them, how they work, what they accomplish. Comparative advantage and the gains from trade. Comparative advantage refers to a situation in which the same type of commodity can be produced with a lower opportunity cost than others. Most exports contain inputs from many different countries and products can travel across borders many times before a finished good or service is made available for sale to consumers. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost Opportunity Cost Opportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. How two parties can get better outcomes by specializing in their comparative advantage and trading. Well, let's see, Charlie can produce a cup, or Charlie's opportunity cost for producing an extra cup is 1/3 of a plate, and Patty's is 3 plates. So he would definitely rather get a plate in the market than have to do it by producing it himself. The online video library hosts a wealth of subjects with video tutorials allowing its users to learn at their own pace. His opportunity cost of producing a cup is lower than it is for Patty. No Singing at 9/11 Memorial – Lesson is to Respect Authority? Lecture 1.15. The following are illustrative … It's only 1/3 of a plate relative to 3 plates. Comparative advantage when one party has absolute advantage in both products. Economics is all around us. But obviously where they end up is dependent on how much the other one is willing to trade. Khan Academy Links for Microeconomics - Comparative... School University of Alabama; Course Title ECON 110; Uploaded By rdwhite418. (n.d.). Loading... Save for later. Email Address. 0. So Charlie could trade 15 cups for 15 plates and obviously Patty would be trading 15 plates for 15 cups. Pages 5 This preview shows page 1 - 3 out of 5 pages. Preview. Author: Created by KhanAcademy. The comparative advantage model is simplistic and may not reflect the real world (for example, only two countries are taken into account). Hello! Click here for instructions on how to enable JavaScript in your browser. Saved by Khan Academy Comparative Advantage World Market Economics Stock Market Gain Finance Marketing School News Absolute advantage. So let's make him specialize in cups. Why do we say that trade and specialization according to comparative advantage lead to one-time increase in PPF of given country? Get one concept every week in your inbox. All Rights Reserved. Now let's think about his opportunity cost. 05/19/2010 12:16 pm ET Updated May 25, 2011 One of the main pillars of international (as well as general) economics is the "Law of Comparative Advantage" (from now on, for brevity, "LCA"). So let's say we're sitting over here, this will just make things simple to just think about the end points, and he's producing 30 cups, what is his opportunity cost of producing 10 plates? PMAP 8141 • Example: Absolute and comparative advantage - YouTube. So what we can see is, for example, they can get an outcome where they are each able to get 15 cups and 15 plates, which would have been impossible left to their own devices. And it's not just because she can produce - We'll see situations in maybe the next video where we'll actually show this. We draw a little bit, actually connect the 2 dots, so that's.. But I assume that they agree to trade at 1 cup for 1 plate. And obviously, and we've talked about this before, the opportunity cost of 1 incremental unit is the same thing as the marginal cost of a cup. If we go to the situation for Patty, let's swap these 2 around, the opportunity cost for 10 cups is 30 plates. Week 4: International Trade, Measuring a Nation’s Income, and Measuring the Cost of Living I'm the supplemental instructor for Dr.Hari's Econ 2302. So cup specialties. I want to make it more looking like a line, so that's about as good as I can do. So hopefully you found that interesting. A developing economy, in sub-Saharan-Africa, may have a comparative advantage in producing primary products (metals, agriculture), but these products have a low-income elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. Comparative advantage specialization and gains from trade | Microeconomics | Khan Academy Comparative advantage specialization and gains from trade | Microeconomics | Khan Academy by Khan Academy 9 years ago 8 minutes, 56 seconds 731,882 views How two parties can get better outcomes by specializing in their comparative advantage and trading Now this is interesting, we can now compare their relative opportunity costs. By specializing they could get these gains of trade. Conclusion Texas High School Graduation Requirements, Ex... Modern children’s literature: twentieth... Types of Texas High School Diplomas – D... 5 of the Best Productivity Apps for Teens. This YouTube video discusses "balance of trade" and "balance of payments." The following two videos from Khan Academy explain the concept of comparative advantage and absolute advantage with the help of examples. Well, if we divide both sides of this right over here by 3, well let's swap both sides, so the opportunity costs for Charlie of producing 3 cups, is equal to 1 plate. Pingback: Misconceptions and Facts: Lies and Truth About the Business of Modeling, Your email address will not be published. Khan Academy Links for Microeconomics - Comparative Advantage PPFs. I'm in class with him Tuesdays and Thursdays from 3:05 to 4:20 in Business 178. Copyright © 2021 Thesis Magazine by General Academic. Or if you divide both sides by 30, the opportunity cost of her producing 1 plate, in terms of cups, is 10 divided by 30, is 1/3, 1/3 of a cup. Comparative advantage, specialization, and gains from trade, Comparative advantage and absolute advantage, Opportunity cost and comparative advantage using an output table, Input approach to determining comparative advantage, Lesson summary: Comparative advantage and gains from trade, Practice: Comparative advantage and the gains from trade. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. And they would both be able to get right over there. May 29, 2014 - In economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. Opportunity cost and comparative advantage using an output table | AP Macroeconomics | Khan Academy 09 min. Which is a situation that was unattainable left to their own production possibilities. Now let's think about the same scenario or let's think about another producer, in this market for dinner ware. AP® is a registered trademark of the College Board, which has not reviewed this resource. Comparative advantage and gains from trade, Khan Academy (video) Comparative Advantage, Library of Economics and Liberty. Lecture 1.16. She has all of these plates, but if she wants a cup, left by herself, she would have to spend 3 plates to do it. Comparative advantage. And Patty could actually do the same thing: she could trade the cups for plates and end up someplace over there. So for Patty, especially when you measure it in terms of cups, it is cheaper for her to produce a plate. Comparative advantage drives specialization in the production of a good in a country as they have a lower opportunity cost and thus leads to higher production and better efficiency. So if he were to focus all of his time on cups, he could produce 30 cups, and if he were to focus all of his time on plates, he could produce 10 plates. Currently you have JavaScript disabled. (Modified comparative advantage model)Can trade with a country that only has one industry be mutually beneficial? If you're seeing this message, it means we're having trouble loading external resources on our website. The difference between absolute advantage and comparative advantage lies in the difference between the advantages inherent in the two factors. So his opportunity cost of producing 10 plates, is equal to 30 cups. Comparative advantage is when a nation can produce a particular good at a lower opportunity cost than other nations. Test Prep Website Launches with 10 Free Tests for SAT, ACT, and Upper Level ISEE, Misconceptions and Facts: Lies and Truth About the Business of Modeling. What we're going to see is if both of these parties specialize in their comparative advantage and then trade, they can get outcomes that are beyond each of their individual production possibility frontiers. Note: Khan Academy has a helpful video about absolute and comparative + gains from trade. So relative to Charlie, we say, because her opportunity cost is lower in producing plates, 1/3 relative to 3, we say that Patty has the comparative advantage in plates, relative to Charlie. The slope of this line is not changing. Created: Mar 29, 2012. But anyway, who has the lower opportunity cost for producing cups? UnitofOutput No.Produced Points TotalPoints: No.ofCitizens PointsPer Citizen Output PointValue ChairLifts: x1.5 Chair&lifts& 1.5 Pushups: x1 Pushups 1 GrandTotal: _____ Pushupstrade&for Chair& But let's say that they both want to get to that 15-15 scenario so they can both trade 15 cups to the other person. So that right over there is the PPF for Charlie. The than another country. It‘s cheaper this way. Week 2: Interdependence and the Gains from Trade & Market Forces of Supply and Demand So let's say we're going to talk about two products -- two types of dinnerware. Comparative Advantage. In the late 1700s, the famous economist Adam Smith wrote this in the second chapter of his book The Wealth of Nations: 'It … Khan Academy is a 501(c)(3) nonprofit organization. It's not that bow-shaped curve that we saw for the hunter gatherer. This is called an absolute advantage, and we'll talk about that more. So, this is what his PPF is going to look like. And because this is a linear PPF his opportunity cost does not change. So she'll want to transact. Donate or volunteer today! Comparative advantage definition and worked ... - Khan Academy edTech Houston Launches to Promote Education Technology. So we've said that Charlie has a comparative advantage in cups. Comparative advantage specialization and gains from trade | Microeconomics | Khan Academy 08 min. Required fields are marked *. 1. Chapter 2 The Ricardian Theory of Comparative Advantage. Discover15 A Great Reading Tool for Any Family, There’s Still Time to Apply for These Scholarships: Part Two, Why the Humanities Matter in K-12 Education, Presbyterian School Students Benefit from Relationship with Houston’s Museums, Strategies to Make Art Come Alive for Kids, Op-Ed: Why the Traditional Low-Tech Classroom Isn’t Enough Anymore, Episcopal High School’s Jay Berckley Espouses the Value of the Arts in the Well Rounded Student. Comparative advantage and absolute advantage | Microeconomics | Khan Academy Comparative advantage and opportunity cost: how economic sharing is caring Searches related to A worked example of using opportunity costs to determine which agent has comparative advantage and who should specialize and trade. And the same thing for Patty. Comparative advantage and absolute advantage | Microeconomics | Khan Academy 10 min. So Charlie specializing in cups means he's going to focus only on cups. So he's going to produce 30 cups every day. And Patty specializing in plates means that she's going to produce 30 plates every day. Khan Academy is a non- profit educational organization created in 2006 by educator Salman "Sal" Khan with the aim of providing a "free, world-class education for anyone, anywhere". Her opportunity cost for producing a plate is lower than it is for Charlie. In summary, Khan Academy is an incredibly useful tool for individuals to use to supplement concepts learned in class or find extra problems to work. And let's say we have a producer, Charlie, and if he were to focus all of his time on cups, he could produce - let me put these [labels]10, 20, 30. Static comparative advantage. So, this makes sense for him because the market price is lower than his opportunity cost. But now in the market, she would only have to give up 1 plate. Read more. Now let's think about it the other way around. This is not why she has a comparative advantage. We will start with the concept of scarcity and how specialization according to comparative advantage helps us achieve more than we could alone. Now imagine, I'm going to make an assumption here, but imagine that they both do that but they don't each only want to have what they're producing they want to have some combination of them, so they decide to trade. The first video explains how two parties can get better outcomes by specializing in their comparative advantage and trading. She has a lower opportunity cost than Charlie does in producing plates. So this is where Charlie has the comparative advantage. We'll have cups on this axis, and we will have plates on this axis. You have remained in right site to start getting this info. Comparative advantage specialization and gains from trade; Comparative advantage and absolute advantage; Law of demand | Supply, demand, and market equilibrium; Price of related products and demand; Changes in income, population, or preferences; Normal and inferior goods | Supply, demand, and market equilibrium; Inferior goods clarificationx She has a comparative advantage because her opportunity cost is lower. Or if you want the opportunity cost for one plate, you just divide both sides by 10, and so you get the opportunity cost of 1 plate, is equal to 3 cups. They specialize in their comparative advantage. A similar concept, competitive advantage is typically used to model the competitiveness of firms and individuals. It doesn't even have to be the case that she can produce more plates in a given day. We're going to talk more about markets in the future. Save my name, email, and website in this browser for the next time I comment. So her opportunity costs to produce 30 plates is equal to 10 cups. She's going to produce 30 plates every day. Your email address will not be published. So this is a good deal, this is lower than her opportunity cost. File Type PDF Aplia Answers Comparative Advantage Aplia Answers Comparative Advantage|helveticab font size 13 format Recognizing the habit ways to get this books aplia answers comparative advantage is additionally useful. Comparative Advantage Specialization and Gains from Trade (no rating) 0 customer reviews. (Let me do this in a different color: magenta). So that is.. and she also has a linear production possibilities frontier, so that right over there is the PPF for Patty. Optimisation and Theory of Comparative Advantage. She would have to give up 3 plates. If she wanted to produce 30 plates then she would have to give up 10 cups. Free. So the opportunity cost, if she's sitting right over here, and she was focused all on cups, and if she wanted to produce 30 plates, and I'm intentionally using the end points to make the math more obvious. Khan Academy has taken the world by storm in the eight years since its inception. Get started . If you divide both sides by 10, the opportunity cost of 1 cup is equal to 3 plates. Well to produce 10 plates, he's going to have to give up those 30 cups. The organization produces short lectures in the form of YouTube videos. So let's see how they can actually do it. It explains the relation between the two, as well as the distinct difference. So, it's only 1/3 plate relative to 3 plates. And we're going to assume he has a linear Production Possibilities Frontier. Video. Or if you divide both sides by 3, opportunity cost of 1 cup is 1/3 of a plate. This YouTube video from the Khan Academy discusses comparative and absolute advantage and the difference between them. And this makes sense for either of them because this trading price, or this market price, is lower than their opportunity cost. However, it cannot replace the traditional classroom and tutoring experience. Our mission is to provide a free, world-class education to anyone, anywhere. Overview of the High School Placement Test (H... Why Do Some Students Hate Their Teachers? These Students Were Admitted to All 8 Ivies – What Can We Learn From Them? The opportunity cost for Charlie to produce a plate is 3 cups, the opportunity cost for Patty to produce a plate is 1/3 of a cup. Saylor Academy. So here's Charlie, he's got all of these cups, left to his own devices, if he wanted an extra plate he would have to spend 3 cups but now in the market, with this price over here, he only has to spend 1 cup for an extra plate. So Charlie has the lower opportunity cost for producing a cup. The Myth of Comparative Advantage. In order to post comments, please make sure JavaScript and Cookies are enabled, and reload the page. Click here for instructions on how to enable JavaScript in your browser. And so they can do, each of them, so for example, Charlie could keep trading cups for plates and he could end up anywhere on this line over there. 0.