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Chapter 2 Notes for Econ 1A

Absolute advantage – Person A has an absolute advantage over Person B if A takes fewer hours
to perform a task than Person B

Comparative advantage – Person A has a comparative advantage over Person B, if A’s


opportunity cost is lower than Person B’s

Opportunity cost – the value you have to give up in order to undertake the activity

Production possibilities curve – a graph that describes the max amount of one good that can be
produced for every possible level of production of the other goods

Attainable point – any combination of goods that can be produced using currently available
resources

Inefficient point – any combination of goods for which currently available resources enable an
increase in the production of one good without reduction in producing the other good

Gains from specialization and exchange - increases total output

Facts that shift the economy’s PPC


-In the short run, to increase one good, the other good decreases
-in the long run, production of all goods can be increased

factors that enhance long-run economy growth will shift the PPC outward
-population growth
-invest in new capital goods (like machines or factories)
-improvement in knowledge and technology

benefit of free trade – specialization increases total output among natives


-as a result – the amount of goods and services available to
consumers will increase
some oppose free trade because – specialization causes less productive domestic industries may
decline
-workers in declining industries may lose their jobs