ECO 1104 Chapter Notes - Chapter 2: Opportunity Cost, Comparative Advantage, Absolute Advantage
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ECO 1104 Full Course Notes
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Countries and firms specialise in making goods for which they have the lowest opportunity cost, and they trade with one another to get the combination of goods they want to consume. The resulting gains from trade can be split up so that everyone ends up better off. Good models help us to understand complex situations through simplifying assumptions that allow us to close in on the most fundamental topics. The story of why china now produces shirts for canadians that canadians themselves were producing a hundred years ago is a complex one. Production possibilities curve/frontier - is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. Each worker can produce either one shirt or two bushels of wheat per day. In other words, there is a trade-off between the quantity of wheat produced and the quantity of shirts produced.