Chapter 2 Comparative_Advantage - 1(From Key Concepts Ch 2...

This preview shows page 1 - 2 out of 2 pages.

(From Key ConceptsCh. 2.)John and Peter are building the 2 types of houses. The number of each type they can builda month is given in this previous table. For instance, John can build either 4 “A houses” or 2 “B houses” in a month.If they have to build 22 houses of each kind, and if they do not specialize at all, they build the following number of houses:A BJohnPeterResource in time (months) they are using if they do not trade and specialize:A BJohnPeterThen, each of them is working 12 months a year in order to produce a total of 22 houses of each type.But, when John builds one B he is not building 2 A, whereas when Peter is building one B he is not building 1 A. Thus, John’s opportunity cost in B is higher than Peter’s, or, to put it that way, Peter’s opportunity cost in B is lower than John’s. If they trade and specialize according to they respective opportunity cost, they can take advantage of their respective “comparative advantage”. John has to specialize in A and Peter in B.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture