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Micro Economy - Research Paper Example

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The reason behind all of this is bound up in the concepts of scarcity, choice and opportunity costs. In their book entitled Principles of…
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Micro Economy
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Micro Economy

Download file to see previous pages... Choosing one alternative requires giving up a number of other alternatives. There is an opportunity cost involved in making choices. Opportunity cost is considered to be the most important concept in economics. It is the value of the best alternative that is given up in order to make a choice (Rittenberg and Tregarthen 2011). It is on these ideas that the theory of comparative advantage is based. A country is deemed to have a comparative advantage in producing a good if it has a low opportunity cost n producing that good. Firms as well as countries have a comparative advantage in producing one good or offering one service over another. It therefore means that since resources – labor, capital are land are scarce they need to make a choice.
The production possibility curve (PPC) is a graphical representation of the different combinations of goods and or services that can be produced in an economy with the resources and technology available. It brings together the three concepts of scarcity, choice and opportunity cost. The choice of producing one good instead of another or a particular combination of goods reflects scarcity of resources, making a choice between alternative options, and highlights the concept of opportunity cost. The slope of the PPC represents the opportunity cost of giving up one good or service for another – in the case of a simple two good/service model. It is this opportunity cost that is used to determine whether a comparative advantage exists. An economy is deemed to have a comparative advantage in the production of a good or service if the opportunity cost of doing so is lower for that economy than any other.
Deardorff in his article entitled The General Validity of the Law of Comparative Advantage though making the point that the law does not hold in multi-commodity world indicates that the comparative advantage determines the form that international trade exhibits (941). This proposition, Deardorff indicates ...Download file to see next pagesRead More
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