Opportunity Cost and Comparative Advantage

Natalia Djohari
Flashcards by Natalia Djohari, updated more than 1 year ago
Natalia Djohari
Created by Natalia Djohari over 4 years ago


Chapter 1 of ECON1101

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Question Answer
Model A simplified version of reality c4b5c261-bf17-4bd2-bd13-51bb21e1b893.png (image/png)
Production Possibility Curve (Frontier) Maximum output possibility for 2+ goods given a set of inputs (resources) are used efficiently
Build PPC steps 1. define axis 2. extreme scenarios 3. plot the combinations 4. connect the dots
Efficient points Points on PPC All resources are used efficiently
Inefficient points Points below the PPC inputs (resources) are not used efficiently
Attainable Points Points on and below PPC amount of goods that can be produced with the available resources
Unattainable Points All points over the PPC Amount of goods that can't be produced with available resources
Absolute Advantage Someone who could produce a good with the less resources than everyone else
Opportunity Cost the value of the next best alternative to an action
Calculate opportunity cost from graph slope (gradient) of the PPC 2af49c2b-c290-4252-b6c7-b19424327ba6.png (image/png)
Comparative Advantage The one who has the least opportunity cost for an activity
Principle of Comparative Advantage Everyone is better off specializing in the activity they have a comparative advantage on f5e1ac59-75d9-4c02-a2c6-25c47bb38cb5.png (image/png)
Steps to draw economy-wide PPC 1. Find the extreme scenarios 2. expand graph in order of comparative advantage 3. Only when first agent finishes resource, change to next agent
Increasing Opportunity Cost First to go has lowest comparative advantage. Once that person finishes his/her resources change to next lowest CA
Other name of Low Hanging Fruit Principle Increasing Opportunity Cost
Factors to shift out PPC 1. increase in infrastructure (factories) 2. increase in population 3. advancement in knowledge and technology
Consumption Possibility Curve all combination of goods the economy can consume
CPC on a closed economy is the same as PPC
The CPC in an open economy is usually greater than the PPC
Why an economic wide PPC is gaped like a bow resources are scarce
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