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| | *Oligopoly and monopolistic competition | | *Oligopoly and monopolistic competition |
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| − | == Comparative Advantage == | + | == The Law of Comparative Advantage == |
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| − | Nearly 3% of CLEP.
| + | There is an interesting concept in economics known as the Law of Comparative Advantage. The CLEP usually asks two questions about it. |
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| | + | '''''The Law of Comparative Advantage states that if one nation can produce two goods more efficiently than another nation, then the first nation should devote all its resources to producing the more efficient of the two goods and let the other nation produce the second good, and then trade one for the other.''''' This Law can apply to individuals and firms as well as countries. |
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| | + | Note that this is not what you might first expect. YOu might expect the first nation to produce BOTH goods, since it can produce both goods more efficiently than the other nation. But upon closer examination it becomes clear that by focusing on what it does best, and produces more efficiently, the first nation can produce more and then trade for the rest, and be better off. Put another way, "do what you do best!" |
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| | + | In sports, sometimes an athlete is good at one sport (e.g., baseball) but great at another sport (e.g., football). John Elway and Deion Sanders, for example were great at football but only good at baseball. John Elway did what he did best: he played only professional football, and became one of the greatest quarterbacks ever. Deion Sanders played both football and baseball, and perhaps did not achieve as much at either as he could have by focusing what he did best. |
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| | Economists observe that utilizing the Law of Comparative Advantage can improve the production possibilities. Suppose your job paid you $9 but you could hire a cook for $6. Then it might make sense for you to work one more hour and hire someone to save you one hour of cooking. In the absence of taxes, you would be $3 better off. Then you could work one-third of an hour less to make the same money (after expenses) as before. That extra one-third of an hour could be added to your sports or relaxation time. You have moved your “production possibilities frontier” (the curve of all possibilities) outward, for greater benefit | | Economists observe that utilizing the Law of Comparative Advantage can improve the production possibilities. Suppose your job paid you $9 but you could hire a cook for $6. Then it might make sense for you to work one more hour and hire someone to save you one hour of cooking. In the absence of taxes, you would be $3 better off. Then you could work one-third of an hour less to make the same money (after expenses) as before. That extra one-third of an hour could be added to your sports or relaxation time. You have moved your “production possibilities frontier” (the curve of all possibilities) outward, for greater benefit |
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| − | Contrast with "competitive advantage."
| + | Note that "comparative advantage" is not the same as "competitive advantage," which simply means something that gives you an advantage in competition over someone else, such as a better location for your gas station. |
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| | == economics of bus trip? == | | == economics of bus trip? == |