EC120 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost
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EC120 Full Course Notes
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Each country should produce what they are good at and trade it with other countries in order to get a variety in their lifestyle. A meat farmer and a potato farmer exist. The meat farmer can only grow meat and the potato farmer only potatoes. After months of just eating potato and meat they would become sick of it and therefore must trade. Trade allows you to specialize and therefore consume more without working more because of what you trade with other countries. Absolute advantage-the comparison among producers of a good according to their productivity. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good. Instead of comparing inputs we can compare opportunity costs. Comparative advantage-the comparison among producers of a good according to their opportunity cost.
