Principles of Economics: understanding opportunity cost, comparative advantage, and absolute advantage
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as part of the
SERC Pedagogic Service Project
Initial Publication Date: January 7, 2011
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.
CollapseLearning 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.
(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).
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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.