Economics Chapter 2 Section 3:

1. Economics Chapter 2 Section 3: Comparative advantage

2. Absolute Advantage • Having an absolute advantage means being able to do something using fewer resources than other producers require.

3. The law of Comparative Advantage • According to the law of comparative advantage, the worker with the lower opportunity coast of producing a particular output should specialize in that output. • Specialization, then, occurs when individual workers focus on single tasks, enabling each one to be more efficient and productive.

4. Gains from Specialization • Absolute advantage focuses on which of you uses the fewest resources, but comparative advantage focuses on what else those resources could have produced- that is, on the opportunity cost of those resources. • The law of comparative advantage indicates who should do what.

5. Exchange • Barter- a system of exchange in which products are traded directly for other products. • Barter works best in simple economies where there is little specialization and few types of goods to trade. • For economies with greater specialization, money plays an important role in facilitating exchange.

6. Money- coins, bills, and checks- serves as a medium of exchange because it is the one things that everyone is willing to accept in exchange for all goods and services.

7. Specialization • Because of specialization based on comparative advantage, most people consume little of what they produce and produce little of what they consume. • People specialize in particular activities, such as plumbing or carpentry, and then exchange their products for money, which in turn is exchanged for goods and services.

8. Division of Labor • McDonald’s • Takes advantage of the gains resulting from the division of labor. • Division of Labor- sorts the production process into separate tasks to be carried out by separate workers. • Each worker specializes in a separate task.

9. Mangers can assign tasks according to individual preferences and abilities. • The worker with the nice smile and good personality can handle the customers up front. • The muscle-bound worker with few social graces can do the heavy lifting in the back room. • The worker who performs the same task again and again gets better at it.

10. The division of labor allows for the introduction of more sophisticated production techniques.