Absolute and Comparative Advantage Essay

An individual, a firm, a region, or a county may develop an area of specialization naturally, but frequently choices mustiness be made to determine what to produce for exchange or trade. Producers should concentrate on the activity in which the)- constitute an absolute advantage. An absolute advantage is the ability to product a good or service victimization fewer resources than other producers use. In the United States, this situation occurs when unmatched region of a country is much suited than another for producing certain products.Florida can grow oranges using fewer resources than Iowa, where heated kilobytehouses would be necessary. Iowa has vast, flat acreage and can produce corn much more efficiently than could Florida. Thus, Florida severalises in oranges while Iowa concentrates on com. and the products are exchanged through the marketplace. When each of two parties has an absolute advantage everyplace the other in producing a particular good or service, it is easy fo r both to decide their areas of specialization. except what happens when one society can produce both goods and services more efficiently than a second party?Should the party with the absolute advantage produce both products for itself? Although this party has the advantage in producing cither good, it should specialize in producing the good in which it has a comparative advantage. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than other producers facc. 1his means lerting the other party produce the good in which it has the lower opportunity cost. Total product will be greater, and exchange will allow both parties to have both goods. Suppose a woman can make $100 per time of day as a marketing consultant.Part of her form includes preparing reports for her clients. Suppose that in addition to being a first-class consultant, she is more efficient at excogitate processing than anyone she might hire to key the reports. Thus, she migh t be able to key in one hour what it takes an assistant two hours to do. As a result, she reasons that, instead of hiring an assistant to do the work, she should do it herself. Is she chastise to do her own keying as well as consulting? If she docs her own keying, she still must take an hour each day from her consulting to do so.The opportunity cost of keying is the S100 she could have earned consulting. The opportunity cost of consulting is the S20 she must pay an assistant to key the reports. Therefore, if she hires an assistant, she can devote her hill time or consulting. I lead gross earnings will be $ 100 greater per day. After paying the assistant $20 for two hours work, she will still have additional net income of $80 per day. Thus, the marketing consultant is bcucr-off specializing overflowing time in the service for which she has the greater comparative advantage.