ECO 201 Chapter Notes - Chapter 3: Opportunity Cost, Comparative Advantage, Absolute Advantage
8 Feb 2018
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Production possibilities: a production possibilities frontier shows the various mixes of output that an economy can produce. It illustrates one of the ten principles of economics: people face trade-offs. Specialization and trade: trade allows both parties to specialize in doing what each does best. Absolute advantage: absolute advantage: comparing the productivity of one person, firm, or nation to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. Thus, absolute advantage is the ability to produce a good using fewer inputs than another producer: comparative advantage: describing the opportunity cost faced by two producers. The price of the trade: for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs, members of the economy cannot all be buyers, nor can all be sellers.
