1. Opportunity Cost and Comparative Advantage Flashcards
What is the definition of absolute advantage?
An agent has an Absolute Advantage in a productive activity when they can carry an activity with LESS RESOURCES than another agent
This is indicated by the intercepts, or area underneath the curve on the PPC
What is the definition of opportunity cost?
The value of the next best alternative to that particular action
This is found by the gradient
What is the definition of comparative advantage?
An agent has a comparative advantage in an activity when they have a LOWER OPPORTUNITY COST of carrying this activity than another agent
When is it worthwhile to purchase a product?
When the price of the product is less than the opportunity cost of producing that product
When is it worthwhile to sell a product?
It will be worthwhile to sell at a price that is more than the opportunity cost for producing that product
What is the low-hanging fruit principle?
In the process of increasing the production of any good, one first employs those resources with the lowest opportunity cost, and only once these are exhausted turn to resources with a higher opportunity cost.
What does the economic welfare depend on?
What they consume (CPC)
Why does the PPC slope bow out from the origin?
• Slope is increasing due to increasing opportunity costs, reflective of the long hanging fruit principal
What are the critiques of the PPC model?
- No psychological cost: Human beings enjoy variety and performing the same activity can result in dissatisfaction
- No transaction cost: Did not account for transaction costs associated with trading (negotiation costs, transportation costs)
- No important quotas or tariffs: would limit the gains from specialisation by making specialisation (beyond a certain level) pointless
- No change in preferences: Demand for goods which an economy specialises in can change and furthermore, social norms (political, religious) can also prevent trade
