ECON1101 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage, Opportunity Cost
Microeconomics Lecture C
● Gains from trade:
○ Voluntary exchange is mutually advantageous
○ NO change in total quantity of goods available. Simply a reallocation of
goods e.g. Homer = 2 pads of paper Virgil = 10 pencils. Homer wants to
trade a pad of paper for 5 pencils.
○ Absolute advantage: where a person or country is more efficient or
productive in producing a good compared to another person or country
○ Comparative advantage: where a person or country can produce one
good more efficiently relative to another good (lower opportunity cost)
compared to another person or country.
○ Trade can benefit both
○ E.g. Total outputs has increased. No more or less inputs used by inputs
have been reallocated across outputs.
○ Each sells the good where she is the lowest OC producer and ha
comparative advantage in producing and buys the good where she is not
the lowest OC producer nor has comparative advantage in producing
○ Production possibilities curve: show maximum combinations of two goods
that are possible given the economy’s resources and level of technology
○ Output bundles within production possibility curves are inefficient and can
do better with the resources available
○ Output bundles on the production possibility curve are efficient
○ Output bundles outside the production possibility curve are impossible due
to insufficient resources
○ Where along PPC does an economy choose?
■ Time element: What is impossible today may be possible tomorrow
■ Producing more capital goods today allows more economic growth
and greater production possibilities tomorrow
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Document Summary
No change in total quantity of goods available. Simply a reallocation of goods e. g. homer = 2 pads of paper virgil = 10 pencils. Homer wants to trade a pad of paper for 5 pencils. Absolute advantage: where a person or country is more efficient or productive in producing a good compared to another person or country. Comparative advantage: where a person or country can produce one good more efficiently relative to another good (lower opportunity cost) compared to another person or country. No more or less inputs used by inputs have been reallocated across outputs. Each sells the good where she is the lowest oc producer and ha comparative advantage in producing and buys the good where she is not the lowest oc producer nor has comparative advantage in producing. Production possibilities curve: show maximum combinations of two goods that are possible given the economy"s resources and level of technology.