Opportunity Cost, PPF and International Trade

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Department
Economics
Course
ECO101H1
Professor
Gustavo Indart
Semester
Summer

Description
Opportunity  Cost,  PPF  and  International  Trade     Important  Knowledge     • Opp  cost  is  the  next  best  alternative  forgone  in  making  an  economic  decision.   -­‐Consists  of  explicit  and  implicit  costs.  Explicit  costs  require  a  cash  outlay  while   implicit  costs  do  not  (  e.g  pleasure)   • Opp  Cost  calculation:   Explicit  Cost  of  Action  –  (Implicit  benefit  of  alternative  –  Explicit  cost  of  alternative)   • Production  Possibilities  Frontier:   A  curve  which  shows  the  possible  combinations  of  producing  two  goods.       Good  A                                     Good  A                                                                               10                                                        X(Unattainable)                                                       Y  (Attainable  &  Efficient)             Z  (Attainable  and  Inefficient)               Good  B                                                                                                     Good  B       20     • As  shown,  Points  outside  the  PPF  are  Unattainable,  Points  on  the  PPF  are  Attainable   &  Efficient,  and  points  inside  the  PPF  are  Attainable  and  Inefficient.   • Opp  cost  is  the  slope  of  the  PPF.  The  slope  in  Diagram  2  is  constant,  so  the  opp  cost   is  constant  throughout  the  graph.  Diagram  2  has  an  increasing  opp  cost.   • Trade  is  when  two  countries  exchange  goods.  Goods  that  countries  have  a   comparative  advantage  in  (lower  opp  cost)  are  exported  while  other  goods  are   imported.   • Absolute  Advantage  is  when  a  country  can  produce  more  units  of  a  good  than   another  country   • Comparative  Advantage  is  when  a  country  can  produce  a  good  at  a  lower  opp  cost   than  another  country.       Summary  of  Questions  to  be  Asked:     1. Calculate  the  opp  cost  of  an  action   Ans.  Explicit  Cost  of  Action  –  (Implicit  benefit  of
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