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Flashcards covering absolute vs. comparative advantage, opportunity cost, and constant vs bowed PPF shapes.
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What is the difference between absolute advantage and comparative advantage?
Absolute advantage is producing more output with the same input; comparative advantage is having the lower opportunity cost in producing a good.
What does opportunity cost mean in the context of production?
The value of the next best alternative forgone when choosing to produce more of one good.
Why should we consider comparative advantage rather than only absolute advantage?
Because specialization based on comparative advantage can make everyone better off even if one person is better at everything.
What simplifying assumption about individuals yields a straight-line PPF with constant opportunity cost?
Assuming all individuals are identical in ability; everyone has the same productivity, which leads to a straight-line PPF.
What does a straight-line PPF imply about opportunity costs along the frontier?
Opportunity costs are constant; the trade-off rate (slope) is the same anywhere on the frontier.
What does a bowed PPF indicate about opportunity costs?
Opportunity costs vary and typically increase as more of one good is produced, reflecting increasing marginal costs.
In the constant-slope example, moving from 50,000 to 40,000 computers and gaining 10,000 televisions shows what about the slope?
The slope is constant, indicating a constant opportunity cost (10,000 televisions per 10,000 computers).
In the bowed-slope example, moving from 50,000 to 40,000 computers and gaining 20,000 televisions demonstrates what?
A changing slope, i.e., increasing opportunity costs and a bowed PPF.
What does the slope of the PPF (rise over run) represent in terms of opportunity cost?
The opportunity cost of producing one more unit of the x-axis good, measured as the amount of the y-axis good sacrificed.