Chapter 2 - Production Possibilities and Gains from Trade Flashcards Preview

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Flashcards in Chapter 2 - Production Possibilities and Gains from Trade Deck (15):

Resource Endownment

  • List of all avalible resources an economy has at a given time.


Production Possibilities Frontier (PPF)

  • Shows the best an economy can do the moment the snapshot was taken.


Calculating Oppurtunity Costs from PPFs

  • Oppurtunity cost of one truck: 2000 smartphones/500 trucks = 4 smartphones.
    • Thus, for one truck, the oppurtunity cost is 4 smartphones.


Points on the PPF

  • All points are efficient.


Points not on PPF

  • Must not be using all their resources or technology to the fullest.


Increasing Opportunity Costs

  • Explain why PPF is bowed out.


The Slope of PPF

  • Opportunity cost of the good on the horizontal axis.


Perfectly Shiftable

  • Resources can be perfectly shiftable.
  • Giving up the same amount of one good to get more of the other.


Economic Growth on PPF

  • Rightward shift.


Economic Contraction on PPF

  • Leftward shift.


Comparative Advantage

  • Has an advantage when someone can produce a good at a lower oppurtunity cost than anyone else.
  • They should specialize in the production of that good.


Gains from Trade

  • Consuming more of both goods than they could have alone.


Two Things About Comparative Advantage

  • If no one has a comparative advantage (same oppurtunity costs) there will be no trade or gains to be made.
  • If someone has a comparative advantage in one good, the other person must have it in the other good, mathematically.


Absolute Advantage

  • If you are more productive than anyone else, you have an absolute advanatge in the production of that good.
  • Not based of of opportunity costs but rather productivity.



  • More productive if you can produce a greater quantity of a good usuing the same quantity of resources as someone else.
  • Also more productive if you can produce the same amount as someone else but fewer resources.