Opportunity Cost & Comparative Advantage (AP Micro Economics) - Vocabulary Flashcards

Vocabulary flashcards covering opportunity cost, law of increasing opportunity cost, PPC shape, absolute vs comparative advantage, and how trade and specialization work.

Opportunity cost

The value of the next-best alternative that must be given up to produce something else.

Law of increasing opportunity cost

As you produce more of any good, the opportunity cost of foregone production increases because resources are not easily adaptable.

Bowed-out PPC

Production Possibility Curve that is bowed outward, reflecting increasing opportunity costs as more of one good is produced.

Per unit opportunity cost

The opportunity cost attributed to producing one more unit of a good; calculated as foregone output divided by units gained.

Absolute advantage

The ability to produce more of a good (or use fewer resources) than a competitor with the same resources.

Comparative advantage

The ability to produce a good at a lower opportunity cost than a competitor.

Specialization based on comparative advantage

Countries should specialize in the good for which they have a comparative advantage to realize gains from trade.

Trade based on comparative advantage

Even if one country has an absolute advantage in all goods, both countries can gain from trade by specializing in the goods with a comparative advantage.

Output method (comparative advantage)

Determines comparative advantage by comparing relative outputs; the country with the higher relative output for a good has the comparative advantage in producing that good.

Input method (comparative advantage)

Determines comparative advantage by comparing opportunity costs in input terms; the country with the lower opportunity cost for producing a good has the comparative advantage in that good.

Emria absolute advantage example

If Emria can produce 48 smartphones and Tonju can produce 39 with the same resources, Emria has an absolute advantage in smartphones.

Comparative cost example (smartphones)

If Emria sacrifices 24 apples to produce 48 smartphones (0.5 apple per smartphone) and Tonju sacrifices 13 apples to produce 39 smartphones (≈0.333 apple per smartphone), Tonju has the lower opportunity cost and hence the comparative advantage in smartphones.