ECON 1101 Chapter Notes - Chapter 3: Comparative Advantage, Absolute Advantage, Opportunity Cost
Document Summary
Production possibilities frontier- a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production of technology. Opportunity cost- whatever must be given up to obtain some item. Gains from trade are based on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, production in the economy rises, making everyone better off. In order for both parties to gain from trade the price at which they trade must lie between the two opportunity costs. Teresa has an absolute advantage in producing corn and producing rye. Sam"s opportunity cost of producing 1 bushel of rye is 5 bushels of corn because 20/4= 5. Teresa"s opportunity cost of producing 1 bushel of rye is 4 bushels of corn because. Sam has a higher opportunity cost of producing rye. Teresa has a higher opportunity cost of producing corn.
