Imagine you are a grocery store owner, the cost of hiring someone to complete your work is $400 per day, while the opportunity cost is $500 per day. You will only do it yourself when hiring cost > opportunity cost.
*** Remember to ignore variations such as hobbies unless you can quantify and turn them into real money.
Absolute advantage refers to a person who can perform a particular task in fewer hours than the other person.
Comparative advantage refers to a person who has a lower opportunity cost of performing a particular task than the other person.
Principle of Comparative Advantage
Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is the lowest.
➜ Total value of output increases with specialization and trade.
Sources of Comparative Advantage
1. Talent
2. Natural recourses
3. Cultures or societal norms
Production Possibilities Curve
A production possibilities curve illustrates the combinations of two goods that can be produced with given sources.
*** The X and Y axes represent the quantity of two different goods.
Unattainable point: F
Inefficient attainable point: E
Efficient attainable points: A, B, C, D
Scarcity Principle ➜ Give up one good to get another
Specialization is easier when
➜ Population density passes a threshold
➜ Markets are connected with transportation and communications
➜ Legal framework
Outsourcing refers to service work performed overseas by low-wage workers
➜ Medical transcription
➜ Customer call centers
➜ Software developing
Limitations to outsourcing
➜ Quality control
➜ Physical presence
➜ Complex communications
Greater security for workers is the ability to adapt quickly to changing environment
