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Principles of Economics: understanding opportunity cost, comparative advantage, and absolute advantage

Marcelo Clerici-Arias
Stanford University
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

In the context of a principles of economics class, students are required to read the international trade chapter before coming to lecture. Students many times have trouble understanding the opportunity cost concept, connecting opportunity cost to comparative advantage, and differentiating between absolute advantage and comparative advantage. In this activity students answer a question that targets the misconception a few hours before class starts. If a large number of students exhibit any of these misconceptions, then the instructor can focus on the most problematic concepts in class.

Learning Goals

Understanding the connection between opportunity cost and comparative advantage, and the difference between absolute advantage and comparative advantage.

Context for Use

This activity was used in the principles of economics class at Stanford University, an American research university. Class size: between 400 and 500. This activity is carried out individually be each student outside of the classroom. Time estimated for completing the activity after reading the relevant chapter: less than a minute. Special equipment necessary: computer and internet connection.

Description and Teaching Materials

Question: Country A and Country B both produce only two goods, cars and computers. If Country A has a lower opportunity cost of producing cars then
(a) Country A has an absolute advantage in car production
(b) Country B has a comparative advantage in computer production
(c) Country A can also have a lower opportunity cost of producing computers
(d) Country A will have a comparative advantage in both goods if Country A also has a lower opportunity cost of producing computers
(e) Country B has an absolute advantaqge in computer production.




Teaching Notes and Tips

The correct answer is (b). A large number of students may answer (a) (showing that they are mistakenly linking opportunity cost with absolute advantage instead of comparative advantage) or (d) (showing a fundamental misunderstanding of opportunity cost and, therefore, comparative advantage).

Assessment

A correct answer in this activity is a positive indication of understanding the concepts of opportunity cost, comparative advantage, and absolute advantage. If the student answer is incorrect, then the instructor can follow up with in-class explanation and further exercises (possibly ConcepTests with individual and paired work) to assess fuller understanding of these concepts.

References and Resources

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