Unit 2 - Assignment

Running Head : UNIT 2 - ASSIGNMENT

Unit 2 - Assignment : Key Terms Definition

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Production Possibility Frontier - a model that 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 , G-7 . When an economy produces only two goods , the increase in production of one good will necessarily draw a decrease in production of the other , because the resources are limited . Production possibility

frontier , in the form of a graph , defines how to use the resources efficiently to produce two goods . For example , if an economy produces fruit juices and furniture an increase of juice production will lead to a decrease of furniture production , because part of the resources will necessarily be diverted from furniture production . The choice can be made according to the demand - if fruit juices are more in demand , it is better to sacrifice in furniture production , and the opportunity cost is justified then

Comparative Advantage - the advantage conferred on an individual or nation in producing a good or service if the opportunity cost of producing the good or service is lower for that individual or nation than for other producers (Krugman Wells , 2009 , G-2 . An individual or a company has a comparative advantage if they can produce a good at a lower opportunity cost than others . It does not mean that they should do it better than others , but only...