ECON 010 Lecture Notes - Lecture 2: Absolute Advantage, Opportunity Cost, Comparative Advantage
Econ010 Chapter 2-Trade-offs, comparative advantage, and the market system
Factors of production: workers, capital, natural resources, entrepreneurial abilities
Production possibility frontier (PPF): shows maximum attainable combinations of 2 products that may
be produced with available resources and current technology; inside curve=inefficient; outside
curve=unattainable; along curve=efficient
Opportunity cost: highest valued alternative that must be given up to engage in an activity
Economic growth: ability of economy to increase production of goods/services; increased standard of
living
Trade: buying and selling
Absolute advantage: ability of individual, firm, country to produce more of a good/service than
competitors using same amount of resources
Comparative advantage: ability to produce a good/service at lower opportunity cost than competitors;
basis for trade
Market: group of buyers and sellers of a good/service and the institution or arrangement by which they
come together to trade
Product markets: markets for goods and services
Factor markets: markets for factors of production (labor, capital, natural resources, entrepreneurial
ability)
Factors of production: inputs used to make goods/services; labor, (physical) capital, natural resources,
entrepreneur (entrepreneurial ability-ability to bring together other factors of production to successfully
produce and sell goods/services)
Circular flow diagram: model illustrating how participants in markets are linked
Free market: market with few gov restrictions on how goods/services can be produced or sold or on
how a factor of production can be employed
Entrepreneur: someone who operates a business, bringing together factors of production
Property rights: rights individuals or firms have to exclusive use of property, including buying/selling
Increasing marginal opportunity costs
Increasing marginal opportunity costs
• Ex: some resources well suited to producing automobiles are forced to produce tanks. Shifting
these resources into producing automobiles allows substantial increase in automobile production
w/out much loss of tank production. But as economy moves down PPF, more and more resources
that are better suited to tank production are switched into automobile production. Thus the
increases in automobile production become increasingly smaller while decreases in tank
production become increasingly larger
The more resources already devoted to an activity, the smaller the payoff to devoting additional resources to
that activity
• Ex: more hrs already spent studying economics, smaller increase in test grade from each
additional hour studying and greater opportunity cost of using the hr that way
Economic growth
Outward shift of PPF
• Increase resources (ie. Labor force, capital stock (amount of physical capital)
• Technology
o Need not affect all sectors equally
Circular Flow of Income
Household- all individuals in a home
• Suppliers of factors of production
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Econ010 chapter 2-trade-offs, comparative advantage, and the market system. Factors of production: workers, capital, natural resources, entrepreneurial abilities. Production possibility frontier (ppf): shows maximum attainable combinations of 2 products that may be produced with available resources and current technology; inside curve=inefficient; outside curve=unattainable; along curve=efficient. Opportunity cost: highest valued alternative that must be given up to engage in an activity. Economic growth: ability of economy to increase production of goods/services; increased standard of living. Absolute advantage: ability of individual, firm, country to produce more of a good/service than competitors using same amount of resources. Comparative advantage: ability to produce a good/service at lower opportunity cost than competitors; basis for trade. Market: group of buyers and sellers of a good/service and the institution or arrangement by which they come together to trade. Factor markets: markets for factors of production (labor, capital, natural resources, entrepreneurial ability)