1. What are opportunity costs?

The opportunity cost of something is what you need to give up in order to get it. For example, if you would prefer to be sleeping now instead of studying economics, the opportunity cost of studying is the sleep you could be enjoying. Opportunity costs are a key element in the way economists look at the world.

2. What is a production possibilities curve?

A production possibilities curve shows all the combinations of output that could be produced with a given set of resources, assuming that the resources are fully and efficiently used.

3. How are specialization and opportunity costs related?

Resources tend to be specialized—that is, better at producing one kind of good or service than another. The individual (firm, region, nation) will specialize in the production of the good or service that has the lowest opportunity cost.

4. Why does specialization occur?

It pays to specialize whenever opportunity costs are different. Two parties can specialize and then trade, which makes both parties better off. Even if one person or nation does something more efficiently than another in the production of a good or service, it does not mean that that person or nation should produce that good or service. Specialization occurs as a result of comparative, not absolute, advantage. Specialization according to comparative advantage minimizes opportunity costs.

5. What are the benefits of trade?

If both parties specialize according to comparative advantage, trading enables them to acquire more of the goods and services they want.