Comparative Advantage - Columbia Uni Summer

Opportunity cost

What you sacrifice when choosing an option

Comparative Advantage

The ability of a person/nation to produce a good at a lower opportunity cost than another person/nation

Absolute Advantage

The ability of a person/nation to produce a good at a lower resource cost than another person/nation

3 Reasons on how to increase productivity

1. Repetition (More time spent -> more proficiency)

2. Continuity (More time spent -> more proficiency)

3. Innovation (Better production methods -> more proficiency)

Import

a product produced in a foreign country and purchased by residents of the home country

Export

a product produced in the home country and sold in a foreign country

Outsourcing

Paying an external third party to do your work

Offshoring

When a domestic firm shifts part of its production to a different country

Market Economy

an economy in which people specialise and exchange goods and services in markets

Centrally Planned Economy

An economy in which a government decides the how much, how to, and who gets the goods produced

Market Failure

When a market’s outcome isn’t the most efficient

How does the government enforce rules on consumer products?

1. Punish people who violate the rules

2. Creates an implicit contract that the product is safe to use (through product liability/tort law)

3. Spreads information about consumer products

How does the government reduce economic uncertainty?

1. Funds a social safety net for poorer citizens

2. Helps fill in for unavailable private insurance

How do entrepreneurs play a role in a market economy?

1. They increase production to meet the higher demand

2. As there is more supply, prices will decrease but profit will still be available

Examples of social and government intervention in market economies?

1. Contracts 2. Insurance 3. Patents

Formula to calculate opportunity cost

Max output of A/ Max output of B
(Opportunity cost of what you’re finding goes on the bottom)

Net Present Value Formula

• CF = Future value

• PV = Present Value

• r = Rate of interest (percentage ÷ 100)

• n = Frequency of interest

• t = Time in years

How do you find the comparative advantage from the opportunity costs determined?

Compare both the opportunity costs by both producers, and choose the lowest one.