Comparative Advantage and Economic Decision Making

Vocabulary flashcards covering key economic concepts from the Comparative Advantage chapter, including opportunity cost, decision pitfalls, specialization, absolute and comparative advantage, production possibilities curves, and outsourcing.

Sunk Costs

something that cannot be recovered

Three Decision Pitfalls in Economics

Common mistakes in economic decision-making: measuring costs/benefits as proportions instead of absolute amounts, ignoring implicit costs, and failing to think at the margin.

Pitfall #1 (Proportions vs. Absolute Amounts)

Measuring costs and benefits as proportions instead of absolute amounts, leading to inconsistent decisions.

Pitfall #2 (Ignoring Implicit Costs)

Overlooking the value of the best alternative forgone when making a choice.

Pitfall #3 (Failure to Think at the Margin)

Not considering the additional benefits and costs of one more unit of an activity, especially regarding sunk costs.

Specialization

Concentrating on one or a few jobs, which enables quick and cheap production, largely due to modern technology.

Absolute Advantage

A person's ability to perform a task in fewer hours than another person.

Comparative Advantage

A person's ability to perform a task at a lower opportunity cost than another person, focusing on skill at one task compared to skill at other tasks.

Principle of Comparative Advantage

The idea that everyone does best when each person (or country) concentrates on activities for which their opportunity cost is the lowest.

Sources of Comparative Advantage

Factors contributing to lower opportunity costs, such as talent, natural resources, cultures/societal norms (languages, institutions, value on craftsmanship, support for entrepreneurship).

Production Possibilities Curve (PPC)

A graph illustrating the combinations of two goods that can be produced with given resources.

Unattainable Point

A combination of goods that cannot be produced with the current resources and technology.

Attainable Point

A combination of goods that can be produced with the current resources and technology.

Inefficient Point

An attainable combination of goods where resources are not being fully or efficiently utilized.

Efficient Point

An attainable combination of goods where resources are being fully and efficiently utilized, typically lying on the PPC.

Scarcity Principle (related to PPC)

The concept that to get more of one good, one must give up some of another good, illustrated by the negative slope of the PPC.

Principle of Increasing Opportunity Cost

The idea that in a production process, as production of one good increases, the opportunity cost of producing an additional unit of that good also increases, because resources with the lowest opportunity cost are used first. Also known as the Low-Hanging-Fruit Principle.

Factors Shifting the PPC

Changes that expand the production possibilities, including more resources (investment in capital, population growth), improvements in technology (more specialization), and increases in knowledge.

Comparative Advantage in International Trade

The application of comparative advantage principle on a global scale, leading to potentially large gains from trading between different and distant countries, despite concentrated costs for some industries and jobs.

Outsourcing

Service work performed overseas by low-wage workers, raising concerns about job security but limited by factors like quality control, need for physical presence, and complex communication requirements.