Comparative advantage among individuals

Principles classes can use this at an early stage for comparative advantage and trade.

Overview

Students are given a starting point and then answer questions concerning opportunity cost, comparative advantage, specialization and exchange. They then can see how specialization according to comparative advantage and trade can make them better off at given prices.

Expected Student Learning Outcomes

Students are expected to recognize comparative advantage and the gains from specialization and trade.

Information Given to Students

There are three files with this activity. The first is somewhat basic and involves easy computations. At an early stage in principles this can help insure that students have a firm grasp on a fundamental concept of economics: grains from voluntary exchange. This is best expressed as a definite quantity of goods to make the idea concrete, and so that students begin to realize that the course is not all about money. The second file contains suggested answers. The third file poses a less computational question. Instructors may want to provide the second version as a substitute or supplementary problem depending on your students and goals. Obviously further modifications are also possible, which are left to the instructor.

Pizza and Wings and gains from trade version 1 (Microsoft Word 2007 (.docx) 15kB Aug7 18)

suggested answers, pizza and wings (Microsoft Word 2007 (.docx) 66kB Aug7 18)

Pizza and Wings and gains from trade version 2 (Microsoft Word 2007 (.docx) 13kB Aug7 18)

The point of version one is to have students recognize comparative advantage and the gains from specialization and trade. Note that version one is a very rudimentary problem, and is not designed to illustrate bargaining among the individuals. It may be helpful to insist that, although prices are quoted in dollars (because students are used to using money), they always MUST express the gains from trade in goods. This helps emphasize a key message of economics at an early part in the course. It also allows one to point out the relationship between money prices and the exchange rate for goods at an early stage.

As my comment above suggests, many students will think or talk like Mercantilists!: it's all about accumulating money! This provides an excellent place to discuss how economics is about people becoming better off, and in this case, these two do so by consuming identifiable goods. This is why we express gains from specialization and trade in goods, not money. This is a point one can come back to later in the course, reminding them of Grace and Frank, or their own experiences in the dining areas around campus where they trade away dining dollars for food they like.

Occasionally, students will get stumped when starting this problem, not knowing where to start. One may prompt them with questions such as: what is Frank good at? What does he want to consume? Remember our discussion of Paula and Gwen last class, what did each of them do in the example?

With version two, one can introduce a discussion of preferences that can be elaborated on at this point, or deferred to a more theory section on consumer theory later in the course.

Students report out by posting their answers on large sheets of paper (11 x 7) taped to whiteboards in front of or around the room. A gallery walk ensues (for those new to TBL, if this may sound like a cross between quiet pondering and managed chaos, well, you're on the right track. The students tend to like it!). On a serious note, students will sometimes bunch up and chat about other things (or phones pop out), so at the same time as the instructor gives feedback or listens to explanations, she or he will need to have an eye toward keeping the class moving through the entire "gallery" of postings. Emphasize engaging with other students on content. Humor of course helps.

Problem set questions provide follow-up reinforcement of the ideas, and test questions on comparative advantage and trade can be posed.