Economic Principles

Running head: ECONOMIC PRINCIPLES
Economic Principles
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1ECONOMIC PRINCIPLES
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................3
Question 4..................................................................................................................................3
Question 5..................................................................................................................................4
Question 6..................................................................................................................................5
References..................................................................................................................................7

2ECONOMIC PRINCIPLES
Question 1
Absolute advantage refers to the ability of a nation to produce a particular good or
service more efficiently (at a lower absolute cost) compared to others (Feenstra 2015). From
the given table, it is seen that in order to produce 1 motorcycle Australia needs 15 labor hours
while Ireland needs only hours. Ireland therefore has an absolute advantage in producing
Motorcycle. Australia in contrast has an absolute advantage in producing guitar as it requires
less labor hours (3 hours < 6 hours) to produce 1 Guitar.
Question 2
Opportunity cost is defined as an economic term implying the value of what is given
up in order to make some other choices (Viner 2016).
Opportunity cost One Motorcycle One Guitar
Australia 15/3 = 5 3/15 = 0.2
Ireland 9/6 = 1.5 6/9 = 0.67
The opportunity cost of producing one motorcycle in Ireland is (9/6) = 1.5 guitar.
Ireland needs 6 labor hours for producing one guitar while 9 labor labors for producing 1
motorcycle. Therefore, to produce 1 motorcycle Ireland needs to sacrifice 1.5 units if guitar.
The opportunity cost of one motorcycle in Australia is (15/3) = 5 guitars. This is because
using 15 labor hours (cost of one motorcycle) Australia can produce 5 guitars.