Chapter 2: Comparing Advantage
What is essentially the Scarcity Principle?
Give up one good to get another
What does "Comparative Advantage" mean?
If the opportunity cost of performing the task is lower than the other person's opportunity cost
What does the Production Possibilities Curve illustrate?
Illustrates the combinations of two goods that can be produced with given resources
What are some examples of outsourcing?
-Medical transcription -Customer call centers -Medical tourism -Technical writing
When is specialization easier?
-Population density passes a threshold, markets are connected -legal framework supports business -financial markets enable start-ups
What are some examples of limits to outsourcing?
-Quality control -Physical presence -Complex communications -Understand nuance
Why are costs concentrated?
-Some industries suffer -People lose their job
How can trade be controversial?
-Trade benefits society broadly -Costs are concentrated
How does the principle of comparative advantage and gains from trade apply worldwide?
Because potentially large gains from trading with different and distant countries
(Ex.) Suppose that the extra cost to Tim of a third glass of soda is zero because he's at a restaurant that gives free refills. According to the Cost-Benefit Principle, Tim should:
Drink a third glass of soda if the extra benefit of doing so is positive
What happens when there is no trade?
Each person can consume along their production possibilities curve (what you produce determines what you consume)
What happens when there is trade?
Each person's consumption can be greater than production (producing according to comparative advantage, trade to get what you want)
The Principle of Comparative Advantage:
Everyone does best when each person (or country) concentrates on the activities for which his/her opportunity cost is the lowest
What factors contribute to cultures or societal norms?
Languages and institutions
A rational person would:
Make choices based on added benefits and added costs
What current choices does PPC represent?
More resources, improvements in technology, and increase in knowledge
What does outsourcing mean?
Service work performed overseas by low wage workers
What causes the total value of output to increase?
Specialization and trade
What are sources of comparative advantage?
Talent, natural resources, cultures or societal norms
What is the greatest security for workers?
The ability to adapt quickly to changing circumstances
If one fails to account for implicit costs in decision making, then applying the cost-benefit rule will be flawed because?
The costs will be understated
What contributes to languages and institution?
Value placed on craftsmanship and the support for entrepreneurship
What is an example of the term "Absolute advantage"?
When you can perform the task in fewer hours than the other person
