© SOUTH-WESTERNCONTEMPORARY ECONOMICS: LESSON 2.2

12.1 Students understand common terms & concepts and economics reasoning.

Standard Address

1

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LESSON 2.3

Comparative Advantage Explain the law of comparative

advantage. Understand the gains from specialization

and exchange.

Objectives

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LESSON 2.3

Comparative Advantage law of comparative advantage absolute advantage specialization barter money division of labor

Key Terms

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Comparative Advantage

Absolute advantage DEFINE?

Law of comparative advantage DEFINE?

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Comparative Advantage and Specialization

X hours without Specialization

David You

Car washing

2 1.5

Lawn mowing

3 1

5 2.5

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Comparative Advantage and Specialization

X hours with Specialization

Car washing

You

Lawn mowing

David

1 3

1 1

2 4

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Comparative Advantage and SpecializationX hours without Specialization

David You

Car washing

2 1.5

Lawn mowing

3 1

5 2.5

X hours with Specialization

Car washing

You

Lawn mowing

David

1 2

1 2

2 4

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Comparative Advantage

Gains from specialization Absolute advantage

Focuses on which of you uses the fewest resources

Law of comparative advantage Focuses on what else those resources could

have produced – that is, on the opportunity cost of those resources.

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Comparative Advantage

Exchange 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.

Money – coins, bills, and checks – serve as a medium of exchange

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Comparative Advantage Wider application

Due to such factors as: climate, an abundance of labor, workforce skills, natural resources, and capital stock,

certain parts of the country and certain parts of the world have comparative advantage in producing particular goods.

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What is the law of comparative advantage?

CHECKPOINT: Page 53Comparative Advantage

The law of comparative advantage says the worker with the lower opportunity cost of producing a particular output (task/job) should specialize in that output.

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Specialization

Specialization is based on comparative advantage, most people consume little of what they produce and produce little of what they consume.

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Specialization

Division of labor Define?

Drawback of specialization People are no longer self-sufficient as

past generations

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What are the gains from specialization and exchange?

CHECKPOINT: Page 54Specialization

The gains from specialization and exchange are that everyone’s time and resources are being allocated most efficiently.