OPPORTUNITY COST AND COMPARATIVE ADVANTAGE

Opportunity cost is defined as the benefit you give up because you choose to take one

action in favor of another. For instance, given a weekly allowance of P1,000.00, how will you

spend it? How much will you spend for food? For transportation? How about the entertainment?

The consideration of your available alternatives explains the concepts of opportunity cost. Let us

assume that P1,000.00 is enough only to cover your food and transportation. So you have to

decide whether to cut back on food or transportation if you want to spend on entertainment. Say

you decided to just walk home and save your transportation budget for a movie ticket. The benefit

of getting home faster by taking a jeep is the opportunity cost of seeing a movie. (Boado, 2017)

Comparative advantage is an economy's ability to produce a particular good or service at a

lower opportunity cost than its trading partners. It plays an important role in determining what goods

and services certain countries may choose to import or export. Consider two nations, country ABC

and country XYZ, that produce only two goods-wine and coffee. See illustration below. Assume

that country ABC is able to produce nine barrels of wine and three bags of coffee per unit of

production, while country XYZ is able to produce eight barrels of wine and two bags of coffee.

Since country ABC has a greater production of both goods, it can be said that country ABC has
absolute advantage over country XYZ. Absolute Advantage id defined as having the ability or

capacity to produce more output compared to another entity. In terms of comparative advantage

there is a need to calculate for the opportunity cost of each country if the countries have to

specialize in the production of only one good. (Boado, 2017)

Fig. 1-Illustration of Comparative Advantage

 What is the opportunity cost for each country in producing only wine?

Wine (ABC)= 3 = 1

Wine (XYZ)= 2 = 1

9 3 or 0.333 bag of coffee

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or 0.25 bag of coffee

 What is opportunity cost for each country in producing only coffee?

Coffee (ABC) = 9 = 3 barrels of wine

Coffee (XYZ)= 8 = 4 barrels of wine

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BASIC ECONOMIC PROBLEMS

The basic economic problems or central problems faced by an economy are as follows:

1. What to produce? It relates to resources. If there is an abundant supply of labor in the society

then society will consider labor intensive products or will focus on providing services instead of

manufacturing goods.

2. How to produce? It focuses on the actual production of goods and services and the allocation

of resources.

3. For whom to produce? It refers on the distribution and consumption of goods and services.