Comparative Advantage: if you have a lower opportunity cost than someone.
Absolute Advantage: higher productivity.
Corn : 10 mill (tonnes)
Potatoes: 15 mill (tonnes)
Corn: 30 mill (tonnes)
Potatoes: 20n mill (tonnes)
Opportunity Costs of each product for each country:
⁃ to get 10 corn, give up 15 potatoes
⁃ to get 1 corn give up 1.5 potatoes
⁃ Opportunity Cost of corn = 1.5
⁃ Opportunity Cost of 1 potato = 1/1.5 corn = 0.67 corn
⁃ to get 30 corn, give up 20 potatoes
⁃ to get 1 corn, give up 0.67 potatoes
⁃ Opportunity Cost of 1 corn = 0.67 potatoes
⁃ Opportunity Cost of 1 potato = 1/0.67 corn = 1.5 corn
Q. Does the opportunity cost of consumption goods increase, decrease, or stay the
same as the productivity of these goods increases?
A. Opportunity cost of consumption goods increases. We have to give up more of our
most productive capital goods’ resources to make more consumption goods. When we
start pulling our best capital good resources, we really see a drop in capital goods
numbers at the expense of fewer and fewer consumption goods.
Resources: anything that can be used to make something else. (AKA: factors of
productions or inputs)
The Big 4 Resources in Micro Economics are: labour, land, capital, and
Scarcity: means that society has limited resources and therefore cannot produce all the
goods and services people wish to have. Markets: allocates resources through the decentralized decisions of ﬁrms and
Positive Economics: what actually is; facts. Ex: high interest rates reduce the demand
Normative Economics: what should be; opinions and value judgements. Ex: banks
should raise interest rates to discourage consumers from taking on mortgages.
Economic Rationality: systematically and purposefully using information to make the
best decisions for oneself to achieve one’s objective.
Perfect Information: everyone knows everything with no uncertainty.
Asymmetrical Information: When someone knows more about something than
someone else does.
Opportunity Costs: to get one thing we usually have to give up something else. Ex.
giving up full time employment for full time schooling.
⁃ In this there is Explicit and Implicit Costs.
⁃ Ex. You attend mac and tuition is 8g, books are 1g, and your apartment is
6g. Your total EXPLICIT COSTS are 15g.
⁃ Although there are other things you give up when coming to mac like your
job at Tim Hortons where you could have earned 23g. This is an IMPLICIT COST.
⁃ So what is the Opportunity Cost of coming to Mac? It is the HIGHEST
forgone alternative (implicit cost) plus your explicit cost.
Marginal Changes: small, incremental changes.
Adam Smith (father of economics): coined the term “invisible hand” which is a
metaphor to describe how the market economy works.
⁃ We all act in our own self-interest. We create a demand for goods and
services that compels others to supply those goods and services