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Absolute Advantage and Comparative Advantage
Each person consumes goods and services produced by many other people around the world. Interdependence and trade allow everyone to enjoy greater quantity goods and services, as well as the variety. Absolute Advantage: - This is the ability to produce a good using fewer inputs than another producer
- This identifies the producer who requires a smaller quantity of inputs to produce a good
Opportunity Cost - This refers to “what must be given up to obtain some item”
- Opportunity Cost of some item is what we give up to get that item
Comparative Advantage - The ability to produce a good at a lower opportunity cost than another producer
- The producer who gives up less of other goods to produce ‘A’ has the smaller opportunity cost of producing good ‘A’
- It isn’t possible for one to have comparative advantage on both goods
- Because the opportunity cost of one goods is the inverse of the opportunity cost of the other
- If a person’s opportunity cost of one good is relatively high, the opportunity cost of the other good should be relatively low.
- Ideally, trade could benefit everyone in the society because it would allow people to specialize in activities in which they have a comparative advantage
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