OPPORTUNITY COSTS - Coursework Example

EXPLAIN THE CONCEPTS OF COMPARATIVE AND ABSOLUTE ADVANTAGE The concept of ‘Comparative and Absolute Advantage’ holds primary importance being closely related to profit maximization and increased productivity. It principally indicates the capability of a producer to manufacture products and/or services at a lesser opportunity cost than other producers operating in almost identical conditions. A comparative advantage provides a company the capacity to trade goods, products and services at a lower fee than other players in the market for the purpose of attaining higher sales margins and revenues.

In the similar context, the concept of obsolete advantage can be identified when a company produces larger volume of goods than that of its competitors with a given amount of resources. In both these situations, companies are affirmed to obtain advantages over its competitors in terms of cost of production and profit margin (Horsley 1-99). For example, in case the USA and Canada have been producing differing quantities of potatoes and rice in a year [as illustrated in the below table], both the producers will have to incur differing opportunity cost. . Assessing both these situations, it can be observed that Canada will have a comparative advantage in producing larger volume of potatoes, with the given amount of resources and also by incurring lesser opportunity cost.

Thus, Canada should produce potatoes. HOW DOES TRADE AFFECT THE PRODUCTION POSSIBILITIES FRONTIER? EXPLAIN Production possibilities frontier, in simple terms, can be referred to as a frontier or a graph indicating the maximum output producing possibilities for a particular producer to manufacture two products at a given point of time. Indicating all possible combinations of the given two products, the production possibilities frontier tends to conclude the possible points at which the producer can manufacture at a greater production level in comparison to the other commodity’s normal production level with the fixed amount of resources (Horsley 1-99).

Trade can affect the production possibilities frontier in a positive as well as in a negative manner. For instance, if the activities related to trade and commerce increases in a country, the requirement of the resources and production capacity with respect to two given commodities is also quite likely to increase (Horsley 1-99). Precisely, the concept of production possibilities frontier indicates the points at which a producer can make the maximum use of the resources allocated to produce one or more commodities.

Notably, the points on the curved line of production possibilities frontier [refer to the diagram below] depicts efficiency of the producer to use the given amount of resources to produce maximum amount of product A and product B. On the contrary, the points below the curved line depict the inefficiency of the producer to make effective use of the resources allocated.