EC120 Chapter Notes - Chapter 3: Opportunity Cost, Absolute Advantage, Comparative Advantage
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Catle-farming pro is bad at growing potatoes and potato growing pro is bad at raising catle should trade with each other so they can both specialize in what they are good at and trade with each other. Absolute advantage- the comparison among producers of a good according to their producivity. Producer that requires a smaller quanity of inputs to produce a good. Opportunity cost- whatever must be given up to obtain some item. Comparaive advantage- the comparison among producers of a good according to their opportunity cost. It is possible for one person to have absolute advantage in both goods, it is impossible for one person to have comparaive advantage in both goods. Since opportunity cost of one good is the inverse of the opportunity cost of the other, if oc of one good is relaively high, his opportunity cost of the other good must be relaively low. Gains from specializaion and trade are based on comparaive advantage.