Congratulations on solving the mysteries behind comparative advantage! Who said that only a super hero could figure this stuff out? With the help of Jack and Andy, you have acquired a super hero's knowledge of…
- Opportunity Cost
Opportunity Cost of Washing Dishes on a Saturday Night You Give up going out with your friends. Your Friend Gives up a dinner of liverwurst sandwiches with Uncle Roy, while watching Gunsmoke reruns on the western channel—whatever that is.
- Opportunity cost is the value of the next best choice that one gives up when making a decision.
- When comparing two producers, whoever gives up more has the higher opportunity cost.
- If you and your friend decide to stay in and be paid to wash dishes on a Saturday night, you will both have to give up something as a result. Shown below is an example of what you and your friend might have to give up; that is, the opportunity cost of washing dishes on a Saturday night.
- You would probably both agree that you have the higher opportunity cost. You have to give up more. Unless, of course, your friend is a fan of potted meat sandwiches and old western TV shows.
- Comparative Advantage
Loads of Dishes Washed in 1 hour Number of Salads Prepared in 1 hour You 2 50 Your Friend 1 50
- When comparing two producers, whoever has the lower opportunity cost has the comparative advantage.
- This time, you and your friend are washing dishes in a restaurant. Suddenly, your boss reports that salad preps are way behind, and one of you will have to step in. You have both prepared salads before.
- For each load of dishes you do, you give up 25 salad preps. For each 25 salad preps you complete, you give up 1 load of dishes.
- For each load of dishes your friend completes, he gives of 50 salad preps. For each 50 salads your friend prepares, he gives up only 1 load of dishes.
- Your opportunity cost of doing dishes is lower than that of your friend. Your friend's opportunity cost of salad preps is higher than yours.
- Knowing this, your boss asks you to wash dishes and asks your friend to prepare the salads.
- Your boss is smart!