ECON 1000 Chapter Notes - Chapter 3: Absolute Advantage, Opportunity Cost, Comparative Advantage
29 Jul 2015
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Let"s say that we have a farmer and a rancher, both of which wish to produce meat and potatoes, we will look at how they will benefit from trade. Both the farmer and the rancher will work 8 hours a day. The farmer can produce 1kg of potatoes in 15 minutes and 1kg of meat in 60 minutes. The rancher can produce 1kg of potatoes in 10 minutes, and 1kg of meat in 20 minutes. The rancher has the absolute advantage in producing meat and in producing potatoes because she requires less time than the farmer to produce a unit of either food. Therefore we conclude that the rancher has a lower cost of producing potatoes if we are measuring cost in terms of the quantity of inputs. The rancher has the following opportunity costs; when the rancher spends 10 minutes to produce. 1kg of potatoes, she spends 10 less minutes producing meat.
