Chapter 2 Flashcards
What is the definition of opportunity cost and how it is computed using either numbers in a
table or a Production Possibilities Curve PPC (also known as a PP Frontier)
Opportunity Cost: The next best alternative use of any resource that must be sacrificed (given up) to have one more of something.
It is computed using either numbers in a table or a PPC/PPF by showing ….
How to determine what is unattainable, attainable but inefficient, and attainable and efficient in a
PPF graph, and know why PPC curves are always downward sloping.
unattainable: points that lie outside the PPF
attainable but inefficient: points inside PPF
attainable and efficient: points on the PPF
PPC curves are always downward sloping: measured by the opp. cost
What is comparative advantage, and how to determine who has such an advantage in a graph or
table with two goods and two nations or individuals
Comparative Advantage: belongs to the person or nation that can (will) produce something at the lowest opportunity cost.
How to determine who has such an advantage in a graph or table:
analyze the opp. costs and compare who has the lowest opp. cost
What is meant by the law of increasing opportunity cost or the low-hanging fruit principle and
recognize it in a PPCF graph.
Law of increasing opp. cost: The more we produce of something, the higher the opp. cost becomes for each additional unit.
We always start w/ the resources that have the lowest opp. cost, as we run out of the cheapest, the cost increases.
In a PPCF graph: the outward-bowing shape of the curve, as you move along the curve to produce more of one good, the slope becomes steeper.
That economic theory suggests that all nations benefit from free trade and specialization, even if
not all individual in all nations benefits equally.
Gains from trade are realized if countries specialize in the good for which they have a comparative adv. & then trade w/ each other.
