ECO 1104 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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ECO 1104 Full Course Notes
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ECO 1104 Full Course Notes
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Chapter 3 - interdependence and the gains from trade. Comparing the productivity of one person, firm, or nation to that of another. The producer requires smaller quantities of resources to produce goods. Has an absolute advantage in producing that good. Opportunity costs: what ever must be given up to obtain some item. The comparison among producers of a good according to their opportunity cost. Producers who give up less to produce goods has the comparative advantage. It is impossible for a producer to have a comparative advantage in producing both goods. One good high cost - one good low cost. Gains from specialization and trade are based on comparative advantage. Specializing in a comparative advantage causes the total production of the economy to rise. Moral: trade can benefit anyone in society because it allows people to specialize in activities in which they have a comparative advantage. Comparative advantage concludes that there are gains from trade.

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