Friday, March 30, 2012

According to the theory of comparative advantage what tasks should one perform and what tasks should one purchase from others?

We generally talk about comparative advantage with
reference to countries rather than individuals, but individuals could be used to
illustrate this theory as well.


If Person A has a lower
opportunity cost for making a good than Person B, Person A has a comparative advantage
in terms of that good.  Person A should make that good and Person B should buy it from
him/her.


The reason for this is that it is in Person B's
best interests to buy that good from Person A even if Person B could make it him/her
self.  If Person B buys this good from Person A, B can use the time and resources she
saved (by not making the good) to make something that is more valuable.  Person B could
then sell that more valuable good to Person A and both will be better
off.


To fully understand this, it is really useful to look
at a chart showing opportunity costs for different people and different goods.  You can
click href="http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=comparative+advantage">here
to find such a chart.

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