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Lecture 2

ECON 101 Lecture 2: ECON 101 - Chapter 2 Notes

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ECON 101
Noriko Ozawa

Tuesday, September 27, 2016 ECON 101 Lecture 2: Trade-Offs, Comparative Advantage and the Market System 2.1 Production Possibility Frontiers and Opportunity Costs Definitions: • Production Possibility Frontier (PPF) - a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology • Opportunity Cost - benefit that a person could have received, but gave up, to take another course of action (Slope of PPF) • Trade-Off - every choice results with something given up (compromise) • Marginal Opportunity Cost - as the economy moves down the PPF, the opportunity cost of producing more objects increases • Economic Growth - an increase in the capacity of an economy to produce goods and services, compared from one period of time to another 2.2 Comparative Advantage and Trade Definitions: • Absolute Advantage - the ability of an individual, a firm, or a country to produce more of a good or service than potential trading partners, using the same amount of resources • Comparative Advantage - the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than potential trading partners The Basis for Trade = Comparative Advantage • Individuals, firms, and countries are better off if they specialize in producing goods and services for which they have a comparative advantage and obtain other goods and services they need by trading. Therefore, one person produces one item and the other produces the • other for an increase in production (Specialization) • EMBRACE FREE-TRADE = exceed the impossible, break past the PPF 1 Tuesday, September 27, 2016 2.3 The Market System Definitions: • Market - a group of buyers and sellers of a good or service and the institutions
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