Micro Foundations · intro
What moves on the Absolute vs. Comparative Advantage diagram
A negative supply shock shrinks Foreign's production possibilities, pulling its PPF inward and re-pricing the opportunity costopportunity costWhat you give up to get something, the value of the next-best alternative you didn't choose. of each good.
Foreign starts with a strong wine advantage: its frontier is steep in wine terms.
A drought wipes out much of the harvest, cutting what Foreign can produce.
Foreign's frontier pulls inward: less is possible everywhere.
With a smaller frontier, Foreign's opportunity costs change, and so does who should specialize in what.
Examiners ask this as: drought, crop failure, harvest fails, bad weather, agricultural collapse.
Other scenarios on Absolute vs. Comparative Advantage