Opportunity cost: The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative. The concept of comparative advantage suggests that as long as two countries (or individuals) have different opportunity costs for producing similar goods, they can profit from specialization and trade. a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. Absolute advantage changed this and countries were told to both export and import. Even those who are disadvantaged at every task still have something valuable to offer. opportunity costs of producing each good, slope becomes steeper as consumers move downward along the curve, "Low- Hanging Fruit Principle" -- States that in expanding the production of any good, a society should employ resources w/ lower opportunity cost (efficient) before moving on to those w/ higher opportunity costs (not efficient), Any combination of goods that can be produced using currently available resources, Any combination of goods that cannot be produced using currently available resources, Any combination of goods for which currently available resources enable an increase in the production of one good w/o a reduction in the production of the other, Any combination of goods for which currently available resources do not allow an increase in the production of one good w/o a reduction in the production of the other, Investing in new factories & equipment, population growth, and improvements in knowledge and technology, Benefits of exchange tend to be larger the larger the differences are b/w the trading partners' opportunity costs, Term increasingly used to connote having services performed by low-wage workers overseas, A good/service that is available for immediate consumption and doesn't add to the future productive ability of the nation (e.g. b. a decrease in the price of DVD players. c. all nonprice determinants of supply are held constant. b. It depends if you mean on a country level or a business level. c. considers designer jeans to be a normal good. a. the price of a resource that is used to produce the good, The rate of tradeoff between producing chairs and producing couches depends on how many chairs and couches are being produced in. 3. Comparative advantage is the ability of… It was important for a while after mercantilism. What is the theory of comparative advantage? The results relate to the multiproduct ﬁrm literature, which usually focuses on how many, not which, products ﬁrms make. Country A has comparative advantage in good X. b. The original idea of comparative advantage dates to the early part of the 19 th century. The more responsive buyers are to a change in price, the. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good. Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. a market structure in which many firms sell products that are similar but not identical. c. Kelly has a comparative advantage in repairing cars and in cooking meals. b. beef and Zardia has a comparative advantage in the production of wheat. However, if an economy doesn’t have an absolute advantage, should it not be producing that good? Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. When a country has this ability, it has an absolute advantage over another country. a. For example, in a single day, Owen can embroider $10$ pillows and Penny can embroider $15$ pillows, so Penny has absolute advantage in embroidering pillows. b. the steepness or flatness of the supply curve for the good. Absolute advantage describes the overall ability of a country to produce a good better and with fewer resources than another country. The upshot is quite extraordinary: Everyone stands to gain from trade. What we're going to see is if both of these parties specialize in their comparative advantage and then trade, they can get outcomes that are beyond each of their individual production possibility frontiers. Later, in the optional appendix to this handout, I will define it more carefully and in several of these ways. Most exports contain inputs from many different countries and products can travel across borders many times before a finished good or service is made available for sale to consumers. Comparative Advantage. Terms. The comparative advantage model is simplistic and may not reflect the real world (for example, only two countries are taken into account). Comparative Advantage One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost (more efficient) -- Fundamental basis for international trade Competitive Advantage vs. View WGU C211 Peng End of Chapter Quizzes 1, 2, 5, 6, 7, 10, 11 Flashcards _ Quizlet.pdf from ECON C211 at Western Governors University, Washington. d. all of the above are examples of markets. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. Indeed, some variation of Ricardo’s example lives on in most international trade textbooks today. Origin of the theory. c. raise the price of the cinnamon rolls. Comparative Advantage. a firm that is a sole seller of a product without close substitutes. Competitive advantage refers to the attributes that allow a company to produce cheaper or better quality products than its competitors. Kelly and David are both capable of repairing cars and cooking meals. b. The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. A developing economy, in sub-Saharan-Africa, may have a comparative advantage in producing primary products (metals, agriculture), but these products have a low-income elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. The theory of comparative advantage is similar and related to that of absolute advantage, but the two economic concepts are definitely distinct. Which of the following is not a determinant of the price elasticity of demand for a good? A country that has an absolute advantage can produce a good at lower marginal cost. Calculate equilibrium price (Pe) and equilibrium quantity (Qe): Specialization and trade are closely linked to. Which of the following is likely to have the most price inelastic demand? When considering competitive advantage, it's important to understand comparative advantage as well. In economics, the term is often applied to entire nations and their economies. Specialization and comparative advantage are separate but related concepts. But the good or service has a low opportunity cost for … Country B has comparative advantage in good X. c. Country A has comparative advantage in good X. The quantity demanded of a good is the amount that buyers are-willing to purchase -willing and able to purchase-willing able and need to purchase-able to purchase. What is Andia's opportunity cost of producing one pound of beef? The original idea of comparative advantage dates to the early part of the 19 th century. Which of the following might cause the supply curve for an inferior good to shift to the right? Comparative advantage does not impact the international division of labor, and I disagree with the idea. It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. an agreement among firms in a market about quantities to produce or prices to charge. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. a. Equilibrium price would decrease, but the impact on equilibrium quantity would be, "Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.. Static comparative advantage. The concept of Absolute Advantage vs Comparative Advantage is related to economics and trade which helps countries making logical decisions on resource allocation for production of specific goods, import and export of goods while considering the marginal cost and opportunity cost of production of those goods. David Ricardo added the theory of comparative advantage. Popularly attributed to English economist David Ricardo and his 1817 book “Principles of Political Economy and Taxation,” the law of comparative advantage refers to a country’s ability to produce goods and provide services at a lower cost than other countries. Comparative advantage says that countries should behave similarly. Absolute advantage is an old idea. Most of the credit for the theory is attributed to David Ricardo, although it had been mentioned a couple years earlier by Robert Torrens. d. World output can rise when each country specializes in what its does relatively best. Which of the following would cause the demand curve to shift from Demand B to Demand C in the market for DVDs in the United States? 1. It is commonly used to compare the economic outputs of different countries (or individuals). **comparative advantage** | the ability to produce a good at a lower opportunity cost than another entity. Then the idea of comparative advantage came along. Comparative advantage does not impact the international division of labor, and I disagree with the idea. b. the ticket price was below the equilibrium price. Absolute advantage describes the overall ability of a country to produce a good better and with fewer resources than another country. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. For a more complete history of these ideas, see Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: Princeton University Press, 1996). On the other hand, comparative advantage is when a country has the potential to produce a particular product better than any other country. So what we can see is, for example, they can get an outcome where they are each able to get 15 cups and 15 plates, which would have been impossible left to their own devices. Ricardo used the theory of comparative advantage to argue against Great Britain’s protectionist Corn Laws, which restricted the import of wheat from 1815 to 1846.
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