Opportunity cost : The cost, in a particular choice, of giving up the next best alternative.

• Opportunity cost : The cost, in a particular choice, of giving up the next best alternative. • Specialization: When the producer specializes in producing the good or service for which they have a comparative advantage. • Trade: When producers exchange goods or services with others, taking advantage of comparative advantages to maximize efficiency and benefits. Example of Comparative Advantage • Suppose that Country A and Country B each produces both wheat and wine. country Wheat(tons per day) wine(bottels per day) country A 100 50 country B 120 60 Looking strictly at the ability to make more of both, it may seem that Country B possesses an absolute advantage over both as it can produce more. BUT it is looking at Opportunity Cost that helps solve our dilemma. • Country A\'s opportunity cost of producing 1 ton of wheat is 0.5 bottles of wine (50 bottles of wine / 100 tons of wheat). • Country A\'s opportunity cost of producing 1 bottle of wine is 2 tons of wheat (100 tons of wheat / 50 bottles of wine). • Country B\'s opportunity cost of producing 1 ton of wheat is 0.5 bottles of wine, because 60 bottles of wine / 120 tons of wheat. • Country B\'s opportunity cost of producing 1 bottle of wine is 2 tons of wheat, because 120 tons of wheat / 60 bottles of wine.