Microeconomics: Comparative Advantage - Deepstash

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Comparative Advantage Definition

Microeconomics: Comparative Advantage

Microeconomics: Comparative Advantage

The law of comparative advantage was first mentioned in 1817 by English economist David Ricardo.

A company has a comparative advantage when it is able to provide a good or service at a lower opportunity cost than others, helping it sell the same product at a lower cost, resulting in better margins.

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Marginal Benefit vs. Marginal Cost
Marginal Benefit vs. Marginal Cost

Marginal benefit and marginal cost are two measures of how the cost or value of a product changes.

  • The marginal benefit is a measurement from the consumer side. It is the maximum amount of money a consumer is willing to pay for an additional good or service.
  • The marginal cost is a measurement from the producer side. It is the change in cost when an additional unit of a good or service is produced.
Marginal Benefit

A marginal benefit change in a consumer's advantage if they use an additional unit of a good or service.

A marginal benefit usually declines as consumption increases. For example, the consumer may buy one ring for $100, but only willing to buy another if the second ring is $50. The consumer's marginal benefit reduces from $100 to $50 from the first to the second good.

Marginal Cost

Producers consider marginal cost, which is the small but measurable change in the expense to the business if it produces one additional unit.

In producing a product, efficiency in productivity can result in making more products in the same amount of time. The cost of raw materials may also go down if it is purchased in bulk, therefore, decreasing the marginal cost.

A financial crisis
A financial crisis

A financial crisis is often associated with a panic or a bank run where investors sell off assets or withdraw money from savings accounts.

  • Asset prices drop in value.
  • Consumers are unable to pay their debts.
  • Financial institutions experience liquidity shortages.
Causes of a financial crisis

Generally, a crisis is caused if institutions or assets are overvalued, and can be worsened by panic and herd-like investor behaviour.

Contributing factors include systemic failures, unexpected or uncontrollable human behaviour, regulatory absence or failures, or contagions that is like a virus that spread from one institution or country to the next. If left unchecked, an economic crisis can cause a recession or depression.

Financial crisis examples
  • The Stock Crash of 1929. On Oct. 24, 1929, share prices collapsed after a period of wild speculation and borrowing to buy shares. It led to the Great Depression, which was felt worldwide. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices.
  • The 20007-2008 Global Financial Crisis. This was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007. Then it moved into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008.