Microeconomics

Name: Danielle

Course & Section: BU204 – 02

Unit: 2

Date: September 1st, 2010

Key Terms - Definitions

Production Possibility Frontier:

“Illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other.” (Krugman & Wells, 2009, p. 25).

To me, a production-possibility frontier, is the graph or chart that shows all the different ways that these two goods or services can be produced with all the given resources and still be done effective. The points that are plotted along the curve are what make the production-possibility frontier.

The graph to the left (Production-possibility frontiers, 2009) show that when a value is outside of the curve, it is impossible or not feasible. When a point is inside the production possibility frontier, it means that the resources are not being used efficiently or to the fullest advantage. It is feasible but not efficient. One or more resources is being wasted or not used to its potential. More of both goods could be produced than are being made.

Comparative Advantage:

“An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people. (Krugman & Wells, 2009, p. 31).

To me, comparative advantages is when a person or company can make something cheaper then another company or person. This gives them an advantage. Just because they have the comparative advantage does not mean that they are the best at making the good or performing there service, it just means that they are able to do it at a lower cost than everyone else. This can benefit trade greatly. An individual should produce more of what there advantage is and less of what there disadvantage is. They will have a comparative advantage in the making of that good or service at a lower cost than its trading partner....