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Learn about absolute and comparative advantage in production, and how they form the basis for exchange. With examples illustrating the concepts, grasp the idea of efficiency in resource allocation and trade benefits. Explore how individuals can capitalize on their strengths to maximize output and economic gains.
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Absolute Advantage One person has an absolute advantage over another if he/she takes fewer hours to perform a task than the other person.
Comparative Advantage One person has a comparative advantage over another if his/her opportunity cost of performing a task is lower than the other person’s opportunity cost
Comparative Advantage: The Basis for Exchange (Example) Jane has: • Absolute advantage in the production of pizzas, but not hamburgers, and has a comparative advantage in the production of pizzas. • Absolute advantage in the production of hamburgers, but not pizzas, and has a comparative advantage in the production of hamburgers. • Absolute advantage in the production of hamburgers and pizzas, as well as a comparative advantage in the production of hamburgers. • Absolute advantage in the production of hamburgers and pizzas, as well as a comparative advantage in the production of pizzas.