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Ch002 - Chapter 2 Comparative Advantage The Basis for...

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Chapter 2 Comparative Advantage: The Basis for Exchange Overview This chapter introduces comparative advantage and shows that having people specialize in the production in which they are relatively more efficient allows the production of more of everything. It introduces the production possibilities curve and develops the production possibilities model to show precisely how specialization enhances the productive capacity of an economy. Core Principles Principle of Comparative Advantage - The chapter introduces and presents this core concept by developing first a one person economy and then two person and multiple person economies. The Principle of Increasing Opportunity Cost - The chapter uses the opportunity cost concept used in previous chapters to introduce comparative advantage. Important Concepts Covered Absolute Advantage Comparative Advantage Production Possibilities Curve Model The Principle of Increasing Opportunity Cost (the Low-Hanging-Fruit Principle) International Trade Teaching Objectives After completing this chapter, you want your students to be able to: Define comparative advantage Define absolute advantage Use opportunity cost to determine comparative advantage Use opportunity cost to determine absolute advantage Explain the Principle of Comparative Advantage Discuss the sources of comparative advantage Identify a production possibilities curve Graph a production possibilities curve Identify attainable and unattainable points on a production possibilities curve 41
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Identify efficient and inefficient points on a production possibilities curve Explain why a production possibilities curve is downward sloping Calculate the slope of a production possibilities curve Explain the Principle of Increasing Opportunity Cost ("The Low Hanging Fruit Principle") Identify the benefits from specialization Discuss the conditions that result in the greatest benefits from specialization Discuss why more specialization is not always better Explain how trade increases consumption possibilities Discuss why some people oppose free trade Answers to Text Questions and Problems Answers to Review Questions 1. An individual has a comparative advantage in the production of a particular good if she can produce it at a lower opportunity cost than other individuals. An individual has
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