Exchange and opportunity cost

• Absolute advantage: one person has an absolute advantage over another if he/she takes fewer hours to perform a task than the other person.

• Comparative advantage: one person has a comparative advantage over another if his/her opportunity cost of performing a task is lower than the other person's opportunity cost.

Comparative advantage and production possibilities

• Production possibilities: curve graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

• Attainable point: any combination of goods that can be produced using currently available resources.

• Unattainable point: any combination of goods that cannot be produced using currently available resources.

• Inefficient point: any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other.

• Efficient point: any combination of goods for which currently available resources do not allow increase in the production of one good with out a reduction in the production of the other.

• Principle of increasing opportunity cost = “low-hanging fruit principle”: in expanding the production of any good, first employ those resources with the lowest opportunity cost and only afterward turn to resources with higher opportunity costs.

Comparative advantage and international trade

• Nations (like individuals) can benefit from exchange, even though one trading partner may be more productive than the other in absolute terms. The greater the difference between domestic opportunity costs and world opportunity costs, the more a nation benefits from exchange with other nations. But expansions of exchange do not guarantee that each individual citizen will do better. In particular, unskilled workers in high-wage countries may be hurt in the short run by the reduction of barriers to trade with low-wage nations.

• Outsourcing: term increasingly used to connote having services performed by low wage workers overseas.