This is the value lost because of getting something else. This implies that in opportunity cost one has to give up something in order to get something. It forms the link between scarcity and choice (Buchanan 2008).A good example is if a student has $1000 and his choice is either to use it pay for a social trip or pay for an extra course in accounting. He chooses the field trip. The opportunity cost in this case is increased benefits in his career obtained from the accounting course that would have resulted if he had undertaken it.
This is a situation where an individual, group or nation has the capability to produce more goods and services than its equal partner with exposure to the same amount of resources. It is a concept where a Nation has the ability to produce more than other Nations using the same amount of labor are. This concept explains why not all Nations can become rich at a uniform rate (Marrewijk, 2007). Comparative advantage on the other hand is a situation where an individual or firm is able to produce a good or service at a lower opportunity cost than other firms thus making it easy to even sell it at a comparatively low price. In absolute advantage, the parties involved are Nations or countries while in comparative advantage it involves individuals of specific firms.
Benefits of Trade
Trade has numerous benefits, it enables consumers to get his desired goods and services for his satisfaction. Additionally, trade creates wide avenues for investments thus being a source of income for both a Nation and it Citizens, which improves the welfare of both National GDPS and citizen’s income.
Supply and Demand
In economical field, supply and demand are models, which are used to determine prices of given commodities in a market. The concepts of demand and supply states that in a well established economic market the price of a given commodity will contrast until a point where the quantity demanded by the consumers is equal to the quantity supplied by the suppliers (Braeutigam, 2010). The ultimate result of this situation is called the economic equilibrium of a market. At market equilibrium, the quantity demanded and quantity supplied are in balance. This determines the overall price and demand of the commodity keeping all other factors constant.
An inferior good or product is a good whereby its demand decreases as income raises (Mankiw, 2012) an inferior good is the direct opposite of a normal good or product. The demand of inferior goods also increases when the income level decreases. The concept of inferior goods is directly related to affordability. For instance, when I have a high income, I would go ahead and purchase a car for my transport.However, when my income is reduced, I would continue to use bus transportation. In this case, the bus is an inferior good.
A price floor is the low amount legally which a product can be sold. Price floors are mostly set by the government where a low price can be changed (Rockoff, 2008).Minimum wage is one type of a price floor. This refers to the lowest or minimum amount or price that can be paid for labor. Price floors are mostly used in the agricultural and other sectors with an aim of protecting farmers and traders from unscrupulous traders. The price floors are set using the equilibrium price. They must be above the equilibrium price and anything below it will render the price floor irrelevant. In instance where the minimum wage is put higher than the equilibrium market price, there is room creation for unemployment especially for unskilled labor. Employers will have to hire few workers thus leading to an increase in mount of labor required. The equilibrium wage for a normal worker will not only depend on the minimum wage but also the skills he has which is in line with the market stipulations.
Braeutigam, R. (2010). “Microeconomics” (4th ed.). Wiley.
Buchanan,J. (2008). “Opportunity cost.” The New Palgrave Dictionary of Economics Online (Second
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Mankiw, G. (2012) “Principles of Economics.”South-Western Cengage Learning, 2012, p.70
Marrewijk, C. (2007-01-18). “absolute advantage” (PDF). Department of Economics, Erasmus University
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Rockoff, Hugh (2008). “Price Controls.”(2nd ed.). Indianapolis