oS82 ECON1010 1. COMPARATIVE ADVANTAGE AND COMPARITIVE ADVANTAGE COMPARATIVE ADVANTAGE AND THE BASIS FOR TRADE Absolute advantage when one person is able to produce gs or perform a task, with less resources than another person Comparative advantage when one persons opportunity cost of producing gs or performing a task, is lower than another persons opportunity cost Principles of comparative advantage everyone can do better when each person concentrates on the activities for which their opportunity cost is lowest (ie comparative advantage) PRODUCTION POSSIBLITY CURVE Production Possibility Curve (PPC) describes the maximum amount of one good that can be produced for every possible level of production of another good. Assumptions 1. There are only two possible productive activities 2. There are only two individuals 3. There are no transaction costs when trading and no other barriers to trade All points on the PPC are called efficient points. 1. Efficient Production Point: currently available resources do not allow an increase in the production of one good without a reduction in the production of the other Inefficient points are points corresponding to situations where inputs are not used efficiently. 2. Insufficient Production Point: currently available resources allow an increase in the production of one good without a reduction in the production of the other. All the points below and to the left of the PPC are inefficient. However, both efficient and inefficient points are attainable points. 3. Attainable Production Point: can be produced with the currently available resources. All the points on the PPC or below and to the left of the PPC are attainable. In contrast, the points to the right and above the PPC are called unattainable. 4. Unattainable Production Point: cannot be produced with the currently available resources. Opportunity Cost: of a given action is the value of the next best alternative to that particular action.