CH2 - • Comparative advantage depends on opportunity cost...

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Chapter 2 Outline Skip the section on the circular flow diagram This outline gives you an idea of the basic topics we will cover in lecture. It is not intended to substitute for lecture. What is an economic model? Simplified representation of reality Relationship between variables What is a variable? The “all else the same” assumption Positive vs. normative analysis The economy is based on specialization and exchange. This chapter deals with specialization. How do economic units decide what to specialize in? Comparative advantage Following your comparative advantage leads to gains from trade Absolute advantage
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Unformatted text preview: • Comparative advantage depends on opportunity cost whereas absolute advantage depends on your ability to perform one given activity better than another person. • How do we find a person’s comparative advantage? • An example from the text: Tom and Hank • International trade: a preview What is a production possibilities frontier? • Identifies all combinations of two goods that can be produced with a given quantity of resources (inputs). • Efficiency and the PPF • Opportunity cost and the PPF • The linear PPF: constant opportunity cost • The bowed-out PPF: increasing opportunity cost • Shifting the PPF...
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