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Created with Fabric.js 1.4.5 Comparative Advantage By Luc Bailey Comparative advantage is when one person or group can produce a good with a lower opportunity cost than another person or group. For example, Joel's company can produce 10 cheese wedges per hour, or 5 crackers per hour. This means, in and 8 hour workday,Joel's company can produce 80 cheese wedgesor 40 crackers. For each cracker his companymakes, the opportunity cost is 2 cheese wedges,whereas for each cheese wedge he makes, the opportunity cost is 1/2 cracker. OR Alison's company, however, is on the bleeding edgeof cracker technology. Her company can make a whopping 20 crackers in an hour! However, hercheese wedge tech is severely lacking because ofthis, so she can only produce 5 cheese wedges perhour. In an 8 hour workday, her company can produce 40 cheese wedges and 160 crackers. Theopportunity cost of each cheese wedge, therefore, is4 crackers while the opportunity cost of her crackersis 1/4 cheese wedge. OR Each of these two companies has comparative advantage over the other on a product.Joel has comparative advantage over Alison in the cheese wedge market because hischeese wedges have an opportunity cost of one cheese wedge is 1/2 of a cracker, which is substantially lower than her cheese wedge opportunity cost of 4 crackers.Alison has comparative advantage over Joel in the cracker market because each ofher crackers has an opportunity cost of only 1/4 of a cheese wedge, while Joel's crackers have an opportunity cost of 2 cheese wedges. This is why each has comparative advantage over the other. If they decided to form a partnership and worktogether, each company specializing in what they are good at, they could turn anenormous profit because of how efficiently they produce.
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