Transcript Absolute Advantage vs. Comparative Advantage

Absolute Advantage
vs. Comparative
Advantage
Explain when a producer has the absolute advantage.
Determine when a producer has the comparative advantage.
Analyze how understanding absolute and comparative advantage helps
producers.
Key Terms
• Tradeoff- what you give up for another item
• Specialization- limiting types of goods or services produced
• Opportunity cost• A computer company produces fewer laptops to meet tablet demand.
• Remember this (point A or B)
Comparative Advantage
• economic theory is
about the potential
gains from trade for
individuals, firms, or
nations that arise from
differences in their
factor endowments or
technological progress.
• Plots along the chart
are A, B, and C for
opportunities.
This table shows the production possibility schedule
for several toothpaste companies. Which company
has the comparative Advantage with small tube of
toothpaste?
Toothpaste
company
Large tubes
Small tubes
Sparkling
100 per hour
200 per hour
Bright White
100 per hour
250 per hour
Fresh!
200 per hour
250 per hour
Mmmint
150 per hour
150 per hour
Competition
• Takes more than 2 companies to compete against each other
• Sometime one company may have an advantage against the
other
• Product
• Price
Absolute Advantage
• A producer with an absolute advantage has the ability to
produce a good or service at a lower cost than any competitor
Absolute Advantage
This table shows the number of cookies several bakeries sell each day.
Who has the absolute advantage?
Bakery
Number of Cookies
Sold
Mrs. Track’s
90
Chips
100
The Bakeshop
75
Uncle John’s
125
Comparative Advantage
• A producer with a
comparative
advantage has the
ability to produce a
good or service at a
lower opportunity
cost than any
competitor can.
MARKET STRUCTURES AND
COMPETITION
Monopolies
• Ever play the game
monopoly
• Any actually win the
game? How do you
win?
• Natural monopolies
occur when one
producer can meet
the market’s entire
demand
Monopolies
• Sanctions/limitations
•
• Technology
monopolies
• Issue a patent for
technology
• Help create and run a
monopoly
• Example- new
pharmaceuticals
releasing a new antidepressant
• Monopoly in the US
• US Postal Service
Oligopolies
• Few producers exist
• Example markets
• Firms cooperate to
reduce competition.
• cell phone carriers
• Consumer choices
are limited in
oligopolies
Oligopolies
• Which practices describe
how producers in
oligopolies generally try
to create competition?
• by offering promotions
• by advertising
• by cultivating brand
loyalty
• By developing a specific
image
Oligopoly
• Which best describes
how advertising
influences consumer
choice in an
oligopoly?
• Advertising informs
brand knowledge.
Oligopolies
• Why is competition
limited in an
oligopoly?
• Barriers prevent new
producers from
entering the market.
• Automobile industry
Competition within the market
• Gives consumers
more choices
• Few barriers to enter
the market
• Typically top 2-3
competitors buyout
the other smaller
businesses to gain a
competitive
advantage
Competition within the market
• Pure Competition
• Independent
competitors in the
market
• Price war
• Milk (Dairy Farm vs.
Kroger brand)
• Corn
• Every seller offers the
same goods
• Different prices
• Some prefer taste
Want to play a game?
COMPETITION WITHIN THE MARKET
Review
• Paul owns a custom clothing shop called Paul's Custom
Clothes and Accessories. He specializes in creating women's
clothing and accessories. He has found that he is able to
produce his shirts at a lower production cost than his
competitors can. However, he has also found that he has a
greater opportunity cost when producing handbags. His
opportunity cost is four shirts for every one handbag, but his
competitor's opportunity cost is two shirts for every handbag.
• What type of advantage does Paul have?
• Absolute advantage
• Lower his opportunity cost
What you need to know
CREATING A BUSINESS
Creating a Business
Steps to create a business
1.
2.
3.
4.
5.
6.
7.
8.
Analyze supply and demand market
Make a choice on what to produce (survey/feedback)
Satisfy the demand with a new idea/product
Create the product
Test the market
Make Adjustments
Sell the product to a larger market
Examine marginal benefit/profit
Creating a business- Key
Factors
• Opportunity cost
• Production Possibility
Curve
• Products
• Labor
• Factors of Production
• Employees needed to
produce a good
• Machines needed to
produce a good
• Standards of Living
• Consumers enjoy
desired goods
• Analyze income
Analyzing profit
• At which level of
production does the
company make the
most profit?
• 4th
• How can producers
make the most profit?
• Decrease marginal cost
• Raise prices to increase
marginal revenue
• Keep marginal cost
below marginal revenue
Summary
• Absolute advantage is
the ability to produce a
good or a service at a
lower production cost
than competitors.
• Comparative advantage
is the ability to produce a
good or service at a
lower opportunity cost
than competitors.
• Market saturation results
from excess supply
• Do you have an absolute
advantage?
• Do you have a
comparative advantage?
• Any opportunity costs?
• Creating Schedules and
Curves Student
Guide.docx
Mini Project
• www.surveymonkey.com
• Docs.google.com
• Create a questionnaire to
start a new business
• Pick one of these
Categories
• New Phone
• New App
• Restaurant
• Work with a partner
and submit answers on
Google docs or
surveymonkey.com
• 5-10 questions
• Can partner with one
person
• Send link to Mr. Lorenz
Types of Questions
• Nominal
• Ordinal
Types of Questions
• Likert Scale
• Cumulative
Rubric
• 5-10 questions
• Asking market
related questions
• Types of questions
• Structured
• Unstructured
• One Likert scale
question
1-2-3-4-5
One Nominal Question
One Ordinal Question
One Cumulative
Question
Summary
• Profit = Revenue –
Expenses
•
•
•
•
•
•
•
Expense
Machine
Electric
Products
What retailers make
Shipping
Packaging
• Who are your
competitors?
• What type of
advantage do you
have?
• Competitive
• Absolute
• http://youtu.be/VmZRJ
qcESIU
• Let’s get to work