Comparative Advantage
Everyone should specialize
where they have the lowest opportunity cost.
OR can produce….
Working all day Gilligan
Working all day the Skipper can produce….
Keys
Cell
4
1
6
3
Gilligan
Skipper
How
Gilligan
giving upgiving
producing
Howmany
manykeys
cellisphones
is Gilligan
up
when hewhen
chooses
make to
1 cell
phone?
producing
he to
chooses
make
1 key?
Keys
O. C. 1 key
Cell Phone
O. C. 1 Cell
4
¼ Cell
1
4 keys
Gilligan
¼
4/1 = 4
How many keys is the Skipper giving up
producing
when
he
chooses
to
make
1
cell
phone?
How many cell phones is the Skipper giving up
producing when he chooses to make 1 key?
Keys
O. C. 1 key
Cell Phone
6
½ Cell
3
O. C. 1 Cell
2 keys
Skipper
3/6 = 1/2
6/3 = 2
The Law of Comparative Advantage says we want to produce
that thing in which we have the lowest opportunity cost
KEYS
T. Keys
O. C. 1 key
Cell Phones
T. Cell Phones
O. C. 1 Cell
4 keys
4
¼ Cell
1
6
½ Cell
3
Gilligan
Skipper
2 keys
1
1
1
1
1
1
Skipper’s
Opportunity Cost
1
1
1
1
1
1
Gilligan’s
Opportunity Cost
Comparative Advantage
20 hour work week

Michael Jordan

10 hours typing x $40 (per
hour)=$400
 10 hours bball x $10,000 (per
hour)=$100,000


20 hour work week



10 hours typing x $20 (per
hour)=$200
 10 hours bball x $1 (per hour)=$10


20 hours of bball x $10,000 an hour
=$200,000

Total output: $200,000
Total output:$100,400
Tom Typist

Michael Jordan
Tom Typist

20 hours of typing x $20=$400

Total output: $400
Total output:$210
Grand Total of Economic Output:
$100,610

Grand Total of Economic Output:
$200,400