Comparative advantage and Cost- Benefit Principle
Comparative advantage and Cost- Benefit Principle 2315
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This 2 page Class Notes was uploaded by Noah Villemarette on Monday September 12, 2016. The Class Notes belongs to 2315 at Texas State University taught by Sherwood Bishop in Fall 2016. Since its upload, it has received 3 views.
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Date Created: 09/12/16
Monday, September 12, y Chapter 2: Comparative Advantage & Cost Benefit Principle Cost Benefit Principle CostBenefit Principle: looking at the benefits of a situation or choice to be made and comparing them to the costs. • Opportunity Cost: the value of the Next best deal or opportunity you give up when making a choice. Explicit Costs: Monetary costs (cash, credit, or a tangible thing of dollar value) Implicit Costs: non Monetary Costs (knowledge or a skill that you get from partaking in one activity over another). What ever you compare has to be similar. They both have to be in the same general industry or way of thinking. • Marginal Quantity: the last bit of resources that you can use before it is costing you explicitly or implicitly. Marginal Cost: the costs to make one additional unit of something Marginal Benefit: the benefit to make additional unit of something. • Positive Concepts: concepts about the economy that can somehow be tested in the real world. • Normative Concepts: concepts that are OPINIONS on what should happen in the economy. 1 Monday, September 12, y Comparative Advantage Absol ute Advantage: having an advantage in production, assembly, and efficiency. Comparative Advantage: Providing things at the lowest opportunity cost compared to a competitor. • Example: England and Portugal both produce wine and cloth. • England has an absolute advantage in both wine and cloth, because when they put all of their resources into one or the other, they can produce wine and cloth more efficiently than Portugal. • Moreover, England also holds the comparative advantage in Wine production, because for every one bottle of wine they produce they are giving up 0.83 pieces of cloth. Which is less than the 1.125 pieces of cloth that Portugal will give up if they produce only wine. • However, Portugal has the comparative advantage in cloth production because for every piece of cloth they produce, 0.88 bottles of wine cannot be produced. Where as if England were to only produce cloth, they would lose 1.2 bottles of wine. Specialization: choosing a Specific skill or industry to make money in. • For specialization to work a countries economy: Must happen in dense population. The more popped who specialize in different things or skills, the better off the economy will be. Can be good for an economy if it is large enough. (the size of the country matters.) Makes individuals wealthier because they take advantage of their comparative advantage. (everyone cannot specialize in the same thing. 2
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