Chapter 2 outline - 20:57 Chapter2: a OpportunityCost o

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20:57 Chapter 2: Economic Tools and Economic Systems 2-1 Choice and Opportunity Cost a. Opportunity Cost o The opportunity cost of the chosen item or activity is the value of  the best alternative that is forgone. Opportunity cost can be thought of as opportunity lost. Sometimes opportunity cost can be measured in terms of  money, although money is usually only part of opportunity  cost. b. Opportunity Cost is Subjective o Opportunity cost is in the eye of the beholder; it is subjective.  Only the individual making the choice can identify the most  attractive alternative. Economists assume tat people rationally choose the most  valued alternative. This does not mean you exhaustively assess the value  of all possibilities. You assess alternatives as long as the expected  marginal benefit of gathering more information about  your options exceeds the expected marginal cost Time is a scarce resource and can cause someone to choose an alternative to their  first choice. Opportunity cost depends on your alternatives Opportunity cost is subjective, but in some cases, money paid for goods and  services is a reasonable approximation. The money measure may leave out some important elements, however, particularly  the value of the time involved. c. Sunk Cost and Choice o Sunk cost is a cost that has already been incurred and cannot be  recovered, regardless of what you do next. You should ignore sunk cost when making economic  decisions. Economic decision makers should consider only those costs  that are affected by the choice, so they are irrelevant.
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2-2: Comparative Advantage, Specialization, and Exchange a. The Law of comparative Advantage o The law of comparative advantage states that the individual with the  lower opportunity cost of producing a particular output should  specialize in that output. b. Absolute Advantage Versus Comparative Advantage o The gains from specialization and exchange so far are obvious. Having an absolute advantage means making something  using fewer resources than other producers require. Absolute advantage focuses on who uses the fewest  resources, but comparative advantage focuses on what else  those resources could produce—that is, one the opportunity  cost of those resources. Comparative advantage is the better guide to who  should do what. The law of comparative advantage applies not only to individuals but also to firms,  regions of the country, and entire nations.
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