ECON 1- Final Exam Guide - Comprehensive Notes for the exam ( 52 pages long!)
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ECON 1 Full Course Notes
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Interdependence and the gains from trade (comparative advantage) Production possibilities frontier- shows various mixes of output that an economy can produce, useful in showing trade-offs. Absolute advantage- when a producer requires a smaller quantity of inputs (time, money, etc. ) to produce a good than another producer. Opportunity cost- whatever must be given up to obtain some item, measures trade-offs. Comparative advantage- the ability to produce a good at a lower opportunity cost than another producer. Each good should be produced by the country that has the smaller opportunity cost of producing that good (us has comparative advantage in producing food, japan in cars) Producer can have an absolute advantage in 2 goods, but one producer cannot have a comparative advantage in both goods. One person will always have a comparative advantage unless they have the exact same opportunity cost. Gains from trade are based on comparative advantage (not absolute advantage)