Unit 3 Economic possibilities and the true cost of doing business Flashcards
Comparative advantage
When he/she has a lower opportunity cost of carrying out the activity than another agent (in a productive activity)
Opportunity cost
The opportunity cost of a given action is the value of the next best alternative to that particular action
The Production Possibility Curve (PPC)
Captures all maximum output possibilities for two (or more) goods, given a set of inputs (or resources - i.e., time) if inputs are used efficiently
Absolute advantage
When he/she can carry out the activity with fewer resources
than another agent (in a productive activity)
Attainable
Represents any combination of goods or services that can be produced with currently available resources
Unattainable
Represents any combination of goods or services that cannot be produced with the currently available resources
Principle of comparative advantage
Everyone is better off if each agent specializes in the activities for which they have a comparative advantage
The gains from specialization are larger the greater is the difference in opportunity costs
Specialization
Specialize in what each in good at and then sell it (supplier)
Buy things that each is not as good at (from someone who is - demander)
Everyone is a demander and/or supplier
There is a collective gain if each specializes according to comparative advantage and trade
Principle of increasing opportunity cost (low hanging fruit)
In the process of increasing the production of any good, first employ those resources with the lowest opportunity cost and only once these are exhausted turn to resources with higher
cost
Consumption possibility curve
Represents all possible
combinations of two goods that the economy can feasibly consume
Classic critiques of the opportunity cost model
No psychological cost
No transaction costs
No import quotas or tariffs
No change in preferences
