Definitions Flashcards
Model
Simplified representation of reality
Production possibility curve (PPC)
All maximum output possibilities for two (or more) goods, given a set of inputs if they are used efficiently
Efficient production point
Cannot increase production of one good without reducing production of another
Inefficient production point
Combination of goods that allow an increase in production of one good without reducing production of the other
Attainable production point
Combination of goods that can be produced with given resources
Unattainable production point
Combination of goods that cannot be produced with given resources
Absolute advantage
Agent who can carry out activity using less resouces (i.e. produce more)
Opportunity cost
Value of the next best alternative to that action
Comparative advantage
An agent who has the lower opportunity cost in carrying out an activity
Principle of comparative advantage
Everyone is better off if each agent specialises in the activity in which they have a comparative advantage
Low-hanging fruit principle/increasing opportunity cost
In the process of increasing production of any good, one first employs resources with lowest opportunity cost and only once these are exhausted turn to resources with higher opportunity cost
Consumption possibility curve
All possible combinations that the economy can consume when it is open to trade
Market
Set of consumers and suppliers willing to buy and sell that good or service
Market equilibrium
When price and quantity sold of a given good is stable (quantity consumers want = quantity suppliers want to sell)
External cost
Cost incurred by someone who is not involved in production or consumption of a given good
External benefit
Benefit accrued to someone who is not involved in production/consumption of a given good
Marginal benefit
Extra benefit accrued by producing that extra unit
Marginal cost
Extra cost of producing that unit
Cost-benefit principle
Action should be taken if the marginal benefit is greater than marginal cost
Economic surplus
Difference between the marginal benefit and cost of taking that action
Quantity supplied
Quantity of given good or service that maximises profit of supplier
Supply curve
Represents relationship between price of a good or service and quantity supplied
Law of Supply
Tendency for a producer to offer more of a certain good or service when the price increases
Horizontal interpretation of the supply curve
Shows how many units the producer is willing to supply at that price
