Ch. 2 - Comparative Advantage

Principle of Increasing Opportunity Cost

"Low- Hanging Fruit Principle" -- States that in expanding the production of any good, a society should employ resources w/ lower opportunity cost (efficient) before moving on to those w/ higher opportunity costs (not efficient)

Capital Good

A good/service that helps in further production and isn't directly consumable (e.g. machines)

Consumption Good

A good/service that is available for immediate consumption and doesn't add to the future productive ability of the nation (e.g. tanning session)

Production Possibilities Curve

A graph that describes the max. amount of one good that can be produced for every possible level of prod. of the other good

Economic Growth

Achieved by giving up current consumption and producing capital goods to enhance the nation's long run productive ability

Efficient Point

Any combination of goods for which currently available resources do not allow an increase in the production of one good w/o a reduction in the production of the other

Inefficient Point

Any combination of goods for which currently available resources enable an increase in the production of one good w/o a reduction in the production of the other

Attainable Point

Any combination of goods that can be produced using currently available resources

Unattainable Point

Any combination of goods that cannot be produced using currently available resources

Why does the PPC slope downward?

B/c of the Scarcity Principal (in order to get more of one, give up another) -- In economies whose workers have diff. opportunity costs of producing each good, slope becomes steeper as consumers move downward along the curve

Trade Among Nations & Individuals

Benefits of exchange tend to be larger the larger the differences are b/w the trading partners' opportunity costs

Specialization

Economic pie is maximized, making possible the largest slice for everyone

PPC Shifts Outward

Investing in new factories & equipment, population growth, and improvements in knowledge and technology

The Principle of Comparative Advantage

Max. production achieved if each person concentrates on the activities for which his or her opportunity cost is lowest

Comparative Advantage

One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost (more efficient) -- Fundamental basis for international trade

Absolute Advantage

One person has an absolute advantage over another if he/she can produce more of a certain good than the other person

Outsourcing

Term increasingly used to connote having services performed by low-wage workers overseas