Chapter 3

Opportunity Cost

EX: Liz can either produce 30 salads or 30 smoothies in an hour. Her opportunity cost is 1:1. Joe can produce 6 smoothies or 30 salads in a hour. His opportunity cost is 1 smoothie is 5 salads or 1 salad for 1/5 of smoothie.

EX:

Sue can produce 50 caps or 10 jackets per hour. Her opportunity cost is 1 cap every .2 jackets and 1 jacket 5 caps. Tessa can produce 70 caps or 7 jackets. Her opportunity cost is 1 cap every .1 jacket or 1 jacket every 10 caps.

Comparative Advantage

The ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else.

Example:

Tom produces 2 rackets and 4 balls an hour. His opportunity cost is 1 racket every 2 balls or 1 ball every 0.5 racket. Abby produces 2 rackets every 8 balls. Her opportunity cost is 1 racket every 4 balls or 1 ball every .25 racket. -In the production of balls Abby has the lower opportunity cost than Tom, and Abby has the Comparative Advantage. -In the production of rackets, Tom has the lower opportunity cost than Abby and Tom as the Comparative Advantage.

Absolute Advantage

When one person or nation is more productive tan another-needs fewer inputs or takes less time to produce a good or perform production task.