Micro Review

Comparative Advantage

Comparative Advantage is an important concept. With comparative advantage, someone who really is no good at anything can be said to have a COMPARATIVE advantage at making something. This makes the person happy. And us happy. Because it's on the AP. And it's interesting. And we should learn it. Because I spent a lot of time on this website, and...yeah.

The opportunity cost for Farmer #1 of making 1 lb of rice is less than Farmer #2's opportunity cost for making 1 lb of rice.

Farmer #1 has a comparative advantage in making rice.

The opportunity cost for Farmer #2 of making 1 lb of beans is less than Farmer #2's opportunity cost for making 1 lb of beans.

Farmer #2 has a comparative advantage in making beans.


Because relative production costs vary, Farmer #1 and Farmer #2 can benefit from trade. Farmer #1 can trade his rice to Farmer #2 at a rate between 0.71 lbs beans/lb rice and 0.75 lbs beans/lb rice and both will benefit.

For example, if Farmer #1 wants beans and Farmer #2 wants rice, farmer #2 can trade 27 lbs of his beans for 37 lbs of Farmer #1's rice. Normally while utilizing all of his resources, Farmer #2 could only produce 36 lbs of beans, however, through trade, Farmer #2 can have 37 lbs of beans.

Farmer #1 also benefits. He has given up only 0.73 lbs rice/lb beans. On his own he would have had to forfeit 0.75 lbs rice to produce 1 lb beans.