Comparative advantage and absolute advantage | Microeconomics | Khan Academy

published on July 13, 2020

What I want to do in this video is make sure we understand the difference between comparative advantage and absolute advantage what we saw in the last video is that Patti had a comparative advantage in pilate's relative to Charlie because her

Opportunity cost of producing one plate was lower than Charlie's opportunity cost of producing a plate hers was one-third of a cup his was three cups so that's why it made sense for her to specialize in plates

Charlie on the other hand had a had a comparative advantage in cups his opportunity cost for producing a cup was only a third of a plate while Paddy's was three plates so that's why he specialized in cups now we can't confuse

This with absolute advantage absolute advantage in a given product just means that you produce that you you are more productive at that thing given the same inputs and so if I were to just give you this graph and you didn't know how many

Workers Charlie or Pattie had and how many inputs they're using to produce either 30 cups in a day or 30 plates in a day you actually could not make any statement about absolute advantage but if we assume that in all of these

Scenarios they have the same number of inputs so if we think about plates if we say given let's say they each have one employee maybe it's themselves and given that well one input that or the same number of inputs Pattie is able to

Produce more plates than charlie then it is true Pattie would have an absolute advantage in plates and if given the same number of inputs Charlie is able to produce more cups than Pattie then he would have an absolute advantage

In cups but it is not because of that absolute advantage that he is specializing it in fact we don't even know what their inputs were it might be that he doesn't have an absolute advantage maybe charlie maybe Charlie

Needs a hundred people to produce 30 cups while Pattie can produce ten cups with one person so in that case actually Pattie would have an absolute advantage but it just wouldn't be obvious from this right over

Here but to make everything clear I want to make a I want to do a scenario where let's say Charlie improved his productivity in some way and he actually has the absolute advantage in both products and still show that as long as

They have different comparative advantage is that it still makes sense for them to specialize so let's let's do another scenario so Charlie has improved dramatically so let's draw our little

Graph here so that's our cups axis and this is still our plates axis cups and plates and let me put some more markers here 10 20 30 and 40 and 10 20 30 and 40 and let's still put patty let's assume patty hasn't changed so this is her PPF

So that is Patty's PPF just like that but let's say that Charlie has improved dramatically and so Charlie's PPF looks like this so this is Charlie's PPF now looks like this so in a given day he can produce and let's just assume that

They're using the same number of inputs so using the same number of inputs in a given day he can produce 40 cups when patty can only produce 10 so he has the absolute advantage in cups or in the same given day using the same inputs he

Could produce 40 plates while patty can only produce 30 so now charlie all of a sudden has an absolute advantage in both in both products but we'll see it still makes sense for them to specialize because they have different comparative

Advantages they have different opportunity costs so let's let's figure this out so we have all the same numbers for Patty actually let me let me copy and paste Patty's numbers right over here actually we have access to our

Numbers right over here so I don't even have to copy and paste it but let's think of Charlie's new numbers now so this is the PPF for charlie so this is our new PPF for charlie maybe he did some investment or R&D to get him this

New awesome productive PBF so he's expanded his PPF so what is his what is his opportunity cost so say like he say he's sitting here what is his opportunity cost of producing so he's producing 40 cups what would be his

Opportunity cost of producing 40 plates well to produce those 40 plates he would have to give up those 40 cups so this opportunity cost of 40 plates is equal to 40 cups or you divide both sides by 40 his opportunity cost for one

Plate one plate is equal to one cup and this is this makes math very easy his opportunity cost for one cup is one cup is equal to is equal to one plate now given this new reality so we've already established Charlie has an absolute

Advantage in both using the same inputs he can do more of either of them and remember when you talk about absolute advantage you have to think about the amount of inputs you use who's more productive in that way but let's think

About comparative advantage if we think about plates who has a lower opportunity cost for producing a plate patty hasn't changed her opportunity cost for to producing a plate is 1/3 of a cup Charlie's opportunity cost for producing

A plate has improved but it's still it's still worse than Patty's he has to spend 1 cup to make a plate she only has to give up 1/3 of a cup to make a plate so patty still has a comparative advantage in plates and if we look at the

Comparative advantage or if we look at the opportunity cost in cups the opportunity cost for Charlie to make one cup is one plate so it actually it's actually a little bit it's actually it's actually a little bit worse than it was

Before but that's as we'll see that it ends up being a good thing he's just overall more productive but his opportunity cost his opportunity cost for one cup he's giving up one plate now and before he was producing 1/3 of a

Plate and that's because in the other scenario he was kind of more he was more one-sided I guess is one way to say it but his opportunity cost for producing a cup is still is still cheaper than Patty's her cost of producing a cup is

Three plates or opportunity cost while his is only one plate so he still has the comparative advantage he still has the comparative advantage in cups so Charlie should still specialize in cups specialize specialize in cups and patty

Should still specialize in plates and to show that they can still get an outcome that is beyond even Charlie's production possibilities frontier let's think about how they could trade so Charlie is going to specialize in cups he's going to sit

Right over they're producing 40 cups a day and Patty is going to specialize she is going to specialize in plates and she's gonna sit right there and produce let me do some different

Color I don't use his color and she's gonna sit right over there and produce 30 plates a day so how could they trade for mutual benefit well any trade that is better than their assuming that they don't want to have only plates or they

Don't only want to have cups any trade that is cheaper than their opportunity cost will be a good one so for example Pat is sitting here producing only plates her opportunity cost for a cup is three plates her opportunity cost for

Cup is three plates so she would be willing to trade anything less than three plates for a cup assuming that she wants it because if she had to make the cups herself she would have to give up three plates so let's say let's say that

She she'd be willing to trade so patty patty patty would be willing willing to trade one cup I started one plate actually let me write this is she's be willing to write two plates two plates for one cup she'd be willing to trade

That because if she had to if she had to if she had to make the cups herself she would have to give up three plates for one cup so she's willing to trade two plates for one cup and let's see if Charlie would be willing to trade two

Plates for one cup so he has all of these cups how many cups does he have to give away for a plate well he has to give away one cup for a plate now he would have to give away one cup for two plates or really he would have to give

Up half a cup for a plate either way this is better than his opportunity cost of of of trying to get that incremental plate so he would be willing to do this to two plates for one cup he'd be willing to do one cup for two plates and

To see how that would improve he could trade so he could have 40 right here 40 cups or he could trade one of them away he could trade one of them away actually let's let's do a scenario where he trades he trades ten of the cups away so

He trades ten of the cups away so now he only has 20 cups but for those 20 cups he traded away for those 20 cups actually that's a bad example because Patty won't have enough cups so let's say he trades away 10 cups

Let's say he trades away 10 cups for those 10 cups so let's get the scenario so Charlie Charlie trades trades 10 cups 10 cups for 20 for 20 plates so now he traded 10 cups and he gets 20 plates so now he'll end up at this scenario right

Over here which was beyond it was unattainable when he was working by himself when he didn't specialize and get these gig gains from trade so this is a good scenario for him he's able to get outcomes that he otherwise would not

Have been able to get he could depending on how he trades he could get outcomes on on that wall up to a certain point up to a certain point because Patti only has 20 Patti only has 30 cups so he can only get about he can only at best he

Could take all of Paddy's cups so he could get something along that line over there but if we look at the same scenario paddy traded to 20 plates for ten cups how does where does that put her so she traded 20 plates so she's

Down to ten plates but she got ten cups so that put her right over here once again beyond her production possibilities frontier so this would look like a pretty good situation for patty as well

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