Opportunity Cost and Comparative Advantage (Beer vs Wine)

Vocabulary flashcards covering key concepts from the lecture notes on opportunity costs, comparative advantage, specialization, and trade illustrated with beer and wine.

Opportunity cost

The value of the next-best alternative forgone when choosing to produce or consume one option over another.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another country, leading to gains from trade when countries specialize.

Specialization

Concentrating production on goods for which a country has a comparative advantage to maximize output.

Gains from trade

Mutual benefits that arise from trading according to comparative advantage.

Trade

The exchange of goods between countries to exploit differences in opportunity costs.

Opportunity cost of producing beer (US)

In the US example, producing one beer costs one unit of wine (one wine) in foregone production.

Opportunity cost of producing wine (France)

In France, producing three wines costs 1.5 beers, so the opportunity cost is 0.5 beer per wine (producing one wine costs half a beer).

Comparative advantage in beer vs wine (US and France)

The United States has a comparative advantage in beer; France has a comparative advantage in wine.

Terms of trade

The rate at which beer and wine are exchanged between the countries, enabling mutual gains.

Gains from trade (example explanation)

If each country specializes in its comparative advantage and trades, both can end up with more beer and wine than if they produced both goods alone.

Production time / hours

Time needed to produce a unit of a good; used to determine opportunity costs (e.g., 1 hour to produce 1 beer in the US).