Chapter 2 Flashcards

1
Q

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)

A

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 ….

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2
Q

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.

A

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

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3
Q

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

A

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

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4
Q

What is meant by the law of increasing opportunity cost or the low-hanging fruit principle and
recognize it in a PPCF graph.

A

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.

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5
Q

That economic theory suggests that all nations benefit from free trade and specialization, even if
not all individual in all nations benefits equally.

A

Gains from trade are realized if countries specialize in the good for which they have a comparative adv. & then trade w/ each other.

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