“EXPLAIN THE LOGIC UNDERLYING The Principle of relative AdvantagE“

“Explain the logic underlying the principle of comparative advantage“

“The standard of relative advantage“

Economics is social science that deals with production, distribution, and consumption of goods and services and with theory and management of economies or economic systems. All economists agree on one thing, economy is large and it is unpredictable. However, throughout years economists have developed some simple but widely applicable principles that are useful when trying to understand decisions that are made by everyday people to workings of highly complex markets. There are Seven centre values of Economics. (Utz-Peter 2001:50)

These principles are: Scarcity Principle, Cost-Benefit Principle, Principle of Unequal Costs, Principle of Comparative Advantage, Principle of Increasing Opportunity Cost, Equilibrium Principle, and Efficiency Principle. Being familiar with these seven core principles is vital in your understanding on how economics operates. (Irwin 1996:14)

Scarcity Principle

The Scarcity Principle basically states having one good thing usually means having less of another. It is one of most basic principles of economics. Although we have boundless needs and wants, resources available to us are limited, there's just not enough good to go around. (Utz-Peter 2001:50)

It basically states that there is cost to consumption, people have unlimited wants but we have limited resources. If not for scarcity, then, there would be no need to concern ourselves with how best to manage resources. Everyone is faced with everyday decisions that involve scarcity. (Utz-Peter 2001:50)

It doesn't matter if you are Bill Gates or homeless man living on streets. When we make decisions about anything, scarcity is usually taken into consideration whether we realize it or not. Gates has enough money to buy more houses, cars, boats, vacations, and basically any consumer good he wants but there will always be only twenty-four hours in day. For Bill Gates time is most scarce for him. (James 1987:21)

The Principle of Comparative Advantage

Comparative advantage is ability of an individual or group to carry out an economic activity, such as production, at lower cost and more efficiently than another entity. Everyone does best when each concentrates on activity for which he or she is relatively most productive. Robert Torrens first described comparative advantage in 1815 in an essay on Corn Laws. He resolved that it was to England's advantage to trade diverse items with Poland in come back for grain, even though it might be possible to make that grain more cheaply in England than Poland. (Kitson 2000:25)

Comparative Advantage basically says economy is best served when people do what they're best at doing, even if they are better at doing some other things than others. When talking about comparative advantage it is important not to confuse it with absolute advantage. Absolute advantage is simply measurement of maximum amount of product that can be produced in given time frame. (Kitson 2000:25)

The country that can produce most has absolute advantage. Just because someone has an absolute advantage does not mean they have comparative advantage. Let's say Molly makes five bicycles in an hour while Pat makes three bicycles ...