Chapter 3 Flashcards
(15 cards)
What is absolute advantage?
The comparison among producers of a good according to their productivity
What determines if a producer has an absolute advantage?
if they require a smaller a smaller quantity of inputs to produce a good
What is comparative advantage?
The comparison among producers of a good according to their opportunity cost
Who has the comparative advantage in producing a good?
The producer with the lowest opportunity cost of producing it?
Is it possible for a person to have an absolute advantage in both goods?
No. If the opportunity cost of one good is lower, the opportunity cost of another good, the inverse, must by definition be higher.
When each person specializes in producing the good for which they have a comparative advantage…
the total production in the economy rises. This increases the size of the economic pie, which can b e used to make everyone better off.
When frank and ruby trade their products, each benefits by
obtaining a good at a price that is lower than heir opportunity cost of that good.
For both parties to gain from trade…
the price at which they trade must lie between the two opportunity costs of the trade partners.
If the price of a good traded is below the lowest opportunity cost of making it…
nobody has any incentive to sell meat. Everyone would want to buy. It is easier to just produce it yourself.
If the price of a good traded is above the higher opportunity costs of the two partner…
both partners would want to sell the good. Nobody wants to buy. It is easier to just produce it yourself.
Connor mcdavid and the driveway shoveler both benefit so long as…
Mcdavid pays her a higher wage than other available work options
What is the maximum price that the driveway shoveler could charge for mcdavid to still benefit?
She could charge up to what mcdavid could earn in the time she takes to shovel the driveway, so several thousands of dollars!
There are no gains from trade if…
opportunity costs are the same between two parties.
What are imports?
Goods and services produced abroad and sold domestically
What are exports?
goods and services produced domestically and sold abroad.
