unit 1 ip 1

Comparative and Absolute Advantages

The example illustrates the production capacities of two financial planners , Phil and Francis . In one hour , Phil produces only 1 financial statement or answer a can answer two more phone calls than Phil or prepare twice the number of financial statements in the same amount of time

It is obvious that Francis has the absolute advantage for both activities . Francis can write more statements and answer more calls for the same amount of input (which is time ) as Phil . The question then arises if it would be most

advantageous if the two planners specialize (doing only one kind of work ) or if they still continue to work independently (doing both kinds of work

The example is a demonstration of the idea of comparative advantage as put forward by 19th century economist David Ricardo . David Ricardo showed that even if one state is at a disadvantage of production of all kinds of goods as compared to another , it would still be better if the two countries traded . This seemed counter intuitive as the notion of a country exporting widget A to another country that produces widget A better and cheaper is the best situation . However , what Ricardo pointed out was that it wasn 't the absolute cost of production that mattered (the amount of input going into the production of a single unit of output ) but rather the opportunity cost of production (how much of product B has to be sacrificed to produce one additional unit of product A . Ricardo 's work forms the basis for the economics of international trade and specialization

Back to the original question , would it be better if both planners specialized or still work on their own . Better in this situation is the most productive situation possible - the most plans written and the most calls answered . To simplify the problem , let us make the following assumptions . First , currently the workload for an 8 hour day is divided equally into answering phone calls and writing plans . Also , let us assume that there is no limit to the number of callers and plans needed to be drawn up and the only limit is how much calls /plans the two can process . Let us then draw up three cases , case A wherein they stay the same and work alone , case B where Phil does all the phone calls and Francis does all the work and Case C which is the opposite of case B . All this is for an 8 hour day

Case A Case B Case C

Calls Plans

Calls Plans

Calls Plans

Phil 36 4 Phil 64 0 Phil 0 8

Francis 40 8 Francis 0 16 Francis 80 0 From the three cases , we can see that increased output for only one product - either the number of plans done or calls answered increase but not both . Additionally , the other product is produced less with specialization

One possible way to have a net increase is to have a modified specialization . In this , Phil...