Chapter 1A Flashcards
Model
A simplified representation of reality.
Production Possibility Curve
represents all maximum output possibilities for two or more goods, given a set of inputs if these inputs are used efficiently.
Efficient Production Point
represents a combination of goods for which currently available inputs do not allow an increase in the production without the reduction in the production of another.
- all points on the PPC
Inefficient Production Point
represents a combination of goods for which currently available inputs allow the increase of the production of a without the reduction in production of another.
- all points below and to the left of the PPC
Attainable Production Point
represents any combination of goods that can be produced with the currently available inputs
- all points on, below and left of PPC
Unattainable Production Point
represents any combination of goods that cannot be produced with the currently available inputs
- all points above or to the right of PPC
Absolute Advantage
When an agent can carry out an activity with less inputs than another agency.
Opportunity Cost
The cost of an action, measured by the value of the next best alternative to that action.
Comparative Advantage
An agent has a comparative advantage when they have a lower opportunity cost of carrying out the action than the other agent.
Principle of Comparative Advantage
Everyone is better off if each agent specialises in the activity they have a comparative advantage.
When do you purchase a product?
When the price of the product is less than the opportunity cost of producing that product.
When do you sell a product?
When the price of selling the product is more than the opportunity cost of producing that product.
