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I’m an economics supplemental instructor, I’ve been doing SI for about 6 semesters,
and this is part of a series of video tutorials to walk through some of the more historically
difficult economics concepts. So the first concept we’re going to cover today is the
idea of comparative advantage. And with comparative advantage there are kind of two related concepts
I’ll be talking about in the same video, they’re the ideas of absolute advantage
and opportunity cost. So first, absolute advantage. Absolute advantage is just the idea that given,
as you can see from this little matrix, given the same amount of resources, one person can
produce more than another person. So if we’re talking about cookies and papers, given, say
the same time block, say 5 hours, Jack can produce 8 papers and Jill can produce 6. So
given the same amount of resources, that 5 hour time block, Jack can write more papers
than Jill can. The same thing with cookies. Given 5 hours, Jack can produce 2 batches
of cookies, and Jill and produce 3. Given the same resources, that 5 hour time block,
Jill can produce more cookies. So that’s absolute advantage. The nest idea, and this
is the main concept we’re talking about in this video, is comparative advantage. Comparative
advantage is the idea that you should specialize in whatever you have the lowest opportunity
cost in. and this brings us to opportunity cost which is just the idea that there’s
a price for everything that you do. And the price of what you do, is what you give up,
is the next best thing you could be doing. So in this example, we’re talking about
cookies and papers. So the opportunity cost of baking cookies is writing a paper. And
the opportunity cost of writing a paper is making cookies. You give up cookies to write
a paper, you give up writing a paper to make cookies. So that’s the idea of opportunity
cost. Comparative advantage is, like I said, is the idea that you should produce whatever
you have the lowest opportunity cost in. So for me, it’s easiest to think about this
in terms of one when I’m trying to decide who has the lowest opportunity cost. So let’s
take cookies. If I want to know how many papers Jack gives up to make one extra batch of cookies,
so I divide this by 2, and because I’ve divided this by 2, I need to do the same to
this side. And then I would divide this by 3 to get 1, and I would do the same thing
here. So to make one extra batch of cookies, Jack gives up 4 papers. To make one extra
batch of cookies, Jill gives up 2 papers. Because Jill gives up fewer papers for one
extra batch of cookies that she makes, Jill has the comparative advantage in cookies because
her opportunity cost in papers is lower than Jack’s. So the nice thing about comparative
advantage is the unlike absolute advantage, if you have a comparative advantage in one
thing, you cannot have it in another, because you can’t have a lower opportunity cost
for both goods. So we know that Jill’s comparative advantage is cookies, so we could just say
Jack’s has to be papers because Jill’s is cookies. But that answer’s probably not
going to fly on a test, do let’s go through and do this again and clean up the numbers
a little bit. So again it’s easier for me to think of this in terms of one. So now we’re
looking at comparative advantage in papers so if Jack writes one paper, he gives up one
fourth of a batch of cookies. If Jill writes one paper, she gives up half a batch of cookies.
Jack has the lowest opportunity cost, he gives up fewer cookies per paper, so he has comparative
advantage in papers. And again we can say if you know the comparative advantage of one
person, you also know the comparative advantage of the other person, but it’s always good
to know how to go through and do this mathematically to show it on a test or a quiz or something
like that.