Opportunity Cost, Trade, and Comparative Advantage in Economics

Opportunity cost of an alternative?

The value of the best alternative not chosen

Opportunity cost is defined as?

The value of the best alternative not chosen

Opportunity cost of producing 10 monitors at $500 each?

Other goods that could be produced with those resources

Why do business executives fly more than retired people?

Because executives value their time more highly

Opportunity cost of attending class?

The value of the highest-valued alternative forgone

Why is trade beneficial?

Because specialization increases total output

If Steve values his boat at $4k, Jennifer at $9k, and sells for $7k, who benefits?

Steve gains $3k, Jennifer gains $2k

Bill Gates billions example shows?

Misunderstanding opportunity cost; specialization and exchange create gains

If John sells bread voluntarily, what happens?

Mutual benefit: both John and Kelly gain

Term for time/effort/resources to make an exchange?

Transaction costs

High transaction costs lead to?

Reduce number of beneficial trades

Internet reduces search/match costs, effect on trade?

Gains from trade will increase

What is a middleman?

Someone who specializes in arranging trades and services

Best example of a middleman?

Real estate agent

Restricting middlemen causes what?

Lose potential gains from trade

Private property rights involve what?

Exclusive use, protection, and right to transfer (all of the above)

Private ownership incentive?

Strong incentive to use resources wisely

Private owner of a resource has what incentive?

Conserve it for future value

Would a farmer planting Douglas fir benefit if crop matures in 50 years?

Yes, the land value will rise and he benefits when he sells

Why more cows than elephants are slaughtered?

Cows can be privately owned, elephants often cannot

Effect of Zimbabwe private rhino reserves?

Black rhino population increased

Why not fully informed in decisions?

Because info is costly, people choose limited info

What does bowed-out PPC curve show?

Increasing opportunity cost

Why is PPC usually curved, not straight?

Resources not perfectly adaptable

Basic principle of PPC?

Must give up some of one good to get more of another

Increasing opportunity costs mean PPC is?

Bowed outward

Which shifts PPC outward?

Technological progress

What is shown when economy uses resources inefficiently?

Point inside PPC

What shifts PPC outward most?

Increased labor force

Which would NOT shift PPC outward?

Decrease in demand for a product

What is illustrated by moving along PPC?

Trade-offs of using same resources differently

Point outside PPC is?

Unattainable

If resources used inefficiently, shown as?

Point inside PPC

Which will likely shift PPC outward?

Improved tech/methods of production

Which would least likely shift PPC outward?

Decline in consumer preferences

What best illustrates scarcity in PPC?

Any point on PPC (trade-offs)

Entrepreneurs decide what?

Which projects to undertake

Why do entrepreneurs innovate?

Profit incentive, reduce costs

Creative destruction means?

New innovations replace old ones

Which law explains trade gains?

Law of comparative advantage

Law of comp. advantage says produce goods with?

Lowest opportunity cost

Law of comp. advantage implies trade in goods with?

Low opportunity cost

Law of comp. advantage suggests?

Countries better off specializing & trading (not self-sufficient)

Why opportunity costs differ among nations?

Because of differences in skills, climate, resources

Why is East Asia engaged in trade?

They gain materially by specializing

Trade creates value because?

People value goods less than the cost to make them themselves