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Absolute Advantage vs. Comparative Advantage Explain when a producer has the absolute advantage. Determine when a producer has the comparative advantage. Analyze how understanding absolute and comparative advantage helps producers. Key Terms • Tradeoff- what you give up for another item • Specialization- limiting types of goods or services produced • Opportunity cost• A computer company produces fewer laptops to meet tablet demand. • Remember this (point A or B) Comparative Advantage • economic theory is about the potential gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. • Plots along the chart are A, B, and C for opportunities. This table shows the production possibility schedule for several toothpaste companies. Which company has the comparative Advantage with small tube of toothpaste? Toothpaste company Large tubes Small tubes Sparkling 100 per hour 200 per hour Bright White 100 per hour 250 per hour Fresh! 200 per hour 250 per hour Mmmint 150 per hour 150 per hour Competition • Takes more than 2 companies to compete against each other • Sometime one company may have an advantage against the other • Product • Price Absolute Advantage • A producer with an absolute advantage has the ability to produce a good or service at a lower cost than any competitor Absolute Advantage This table shows the number of cookies several bakeries sell each day. Who has the absolute advantage? Bakery Number of Cookies Sold Mrs. Track’s 90 Chips 100 The Bakeshop 75 Uncle John’s 125 Comparative Advantage • A producer with a comparative advantage has the ability to produce a good or service at a lower opportunity cost than any competitor can. MARKET STRUCTURES AND COMPETITION Monopolies • Ever play the game monopoly • Any actually win the game? How do you win? • Natural monopolies occur when one producer can meet the market’s entire demand Monopolies • Sanctions/limitations • • Technology monopolies • Issue a patent for technology • Help create and run a monopoly • Example- new pharmaceuticals releasing a new antidepressant • Monopoly in the US • US Postal Service Oligopolies • Few producers exist • Example markets • Firms cooperate to reduce competition. • cell phone carriers • Consumer choices are limited in oligopolies Oligopolies • Which practices describe how producers in oligopolies generally try to create competition? • by offering promotions • by advertising • by cultivating brand loyalty • By developing a specific image Oligopoly • Which best describes how advertising influences consumer choice in an oligopoly? • Advertising informs brand knowledge. Oligopolies • Why is competition limited in an oligopoly? • Barriers prevent new producers from entering the market. • Automobile industry Competition within the market • Gives consumers more choices • Few barriers to enter the market • Typically top 2-3 competitors buyout the other smaller businesses to gain a competitive advantage Competition within the market • Pure Competition • Independent competitors in the market • Price war • Milk (Dairy Farm vs. Kroger brand) • Corn • Every seller offers the same goods • Different prices • Some prefer taste Want to play a game? COMPETITION WITHIN THE MARKET Review • Paul owns a custom clothing shop called Paul's Custom Clothes and Accessories. He specializes in creating women's clothing and accessories. He has found that he is able to produce his shirts at a lower production cost than his competitors can. However, he has also found that he has a greater opportunity cost when producing handbags. His opportunity cost is four shirts for every one handbag, but his competitor's opportunity cost is two shirts for every handbag. • What type of advantage does Paul have? • Absolute advantage • Lower his opportunity cost What you need to know CREATING A BUSINESS Creating a Business Steps to create a business 1. 2. 3. 4. 5. 6. 7. 8. Analyze supply and demand market Make a choice on what to produce (survey/feedback) Satisfy the demand with a new idea/product Create the product Test the market Make Adjustments Sell the product to a larger market Examine marginal benefit/profit Creating a business- Key Factors • Opportunity cost • Production Possibility Curve • Products • Labor • Factors of Production • Employees needed to produce a good • Machines needed to produce a good • Standards of Living • Consumers enjoy desired goods • Analyze income Analyzing profit • At which level of production does the company make the most profit? • 4th • How can producers make the most profit? • Decrease marginal cost • Raise prices to increase marginal revenue • Keep marginal cost below marginal revenue Summary • Absolute advantage is the ability to produce a good or a service at a lower production cost than competitors. • Comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors. • Market saturation results from excess supply • Do you have an absolute advantage? • Do you have a comparative advantage? • Any opportunity costs? • Creating Schedules and Curves Student Guide.docx Mini Project • www.surveymonkey.com • Docs.google.com • Create a questionnaire to start a new business • Pick one of these Categories • New Phone • New App • Restaurant • Work with a partner and submit answers on Google docs or surveymonkey.com • 5-10 questions • Can partner with one person • Send link to Mr. Lorenz Types of Questions • Nominal • Ordinal Types of Questions • Likert Scale • Cumulative Rubric • 5-10 questions • Asking market related questions • Types of questions • Structured • Unstructured • One Likert scale question 1-2-3-4-5 One Nominal Question One Ordinal Question One Cumulative Question Summary • Profit = Revenue – Expenses • • • • • • • Expense Machine Electric Products What retailers make Shipping Packaging • Who are your competitors? • What type of advantage do you have? • Competitive • Absolute • http://youtu.be/VmZRJ qcESIU • Let’s get to work