Chapter 2: Comparative Advantage Flashcards
production possibilities frontier (ppf)
line or curve that shows the maximum attainable combinations of two goods that can be produced with available resources and current technology
factors of production
land, labor (time spent working), capital (equipment), human capital (entrepreneurship)
OC (X)
loss in Y/gain in X
slope of ppf is equal to
the opportunity cost of the good on the x axis
opportunity costs are
the reciprocal of each other
how to find slope of ppf (m)
y1-y2/x1-x2
how to calculate OC when inputs are given
use IOU
IOU
when Inputs are given, put the Other good (the good you are not finding the OC of), Underneath your fraction (in the denominator)
shifts in the PPF represent
economic growth or economic decline
economic growth
an increase in an economy’s ability to produce
goods and services, represented by shifting the PPF outwards
what causes economic growth
increase in the economy’s factors of production
(labor, land, physical capital, human capital)
economic decline
a contraction in an economy’s ability to produce
goods and services, represented by shifting the PPF inwards
what causes economic decline
a decrease in the economy’s factors of production
what does a linear PPF represent
constant opportunity cost
absolute advantage
The ability of an individual, a firm, or a country to
produce more of a good or service than another individual, firm, or country
comparative advantage
The ability of an individual, a firm, or a country
to produce a good or service at a lower opportunity cost than another
individual, firm, or country
principle of comparative advantage
each party in a trading relationship should specialize in the production of the good in which they have a comparative advantage (lower opportunity cost) and trade for other goods and services
trade
the act of buying and selling
with trade
each person’s consumption can be greater than their production
sources of comparative advantage
- natural resources due to climate and environment
- historical and cultural artifacts (pre-existing resources, legal and educational institutions)
- talent
outsourcing
the sending of domestic jobs overseas, due to lower costs
of labor abroad
