Comparative Advantage, Opportunity Cost, and the Production Possibility Frontier (PPF)

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Flashcards covering absolute vs. comparative advantage, opportunity cost, and constant vs bowed PPF shapes.

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9 Terms

1
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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.

2
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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.

3
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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.

4
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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.

5
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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.

6
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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.

7
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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).

8
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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.

9
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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.