ECO101H1 Chapter Notes - Chapter 3 & 4: Demand Curve, Absolute Advantage, Comparative Advantage
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ECO101H1 Full Course Notes
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Absolute advantage the comparison among producers of a good according to their productivity. Comparative advantage the comparison among producers of a good according to their opportunity cost. Comparative advantage is the driving force of specialization. Trade allows both an opportunity that would be impossible in the absence of trade. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. Cost of producing a product can be determined by comparing inputs required or comparing the opportunity costs. The producer who gives up less of other goods to produce good x has the smaller opportunity cost of producing good x and is said to have a comparative advantage in producing it. It is impossible for one person to have a comparative advantage in both goods. Unless the 2 people have the exact same opportunity cost, there will be comparative advantages.
