Econ 101: Chapter 8

Question 1

Gains from trade

Answer 1

the benefits that come from reallocating resources, goods, and services to better uses.

Question 2

Money is…

Answer 2

a convenience that allows you to engage in more complicated trades.

Question 3

absolute advantage

Answer 3

the ability of one person to do a task using fewer inputs that someone else.

Question 4

absolute advantage tells you…

Answer 4

who’s best at a task, but not who should do the task.

Question 5

Comparative advantage

Answer 5

the ability to do a task at a lower opportunity cost.

Question 6

Comparative advantage is about…

Answer 6

allocating resources to their better uses.

Question 7

opportunity cost of a task =

Answer 7

hours this task takes/ hours it takes to produce alternative output.

Question 8

Does everybody have a comparative advantage?

Answer 8

Yes. Even if they don’t have an absolute advantage in anything.

Question 9

Steps to identify who has a comparative advantage in what:

Answer 9

1. Determine how long each task takes per person
2. Calculate the opportunity cost
3. assess who has the lowest opportunity cost of each task.

Question 10

Due to comparative advantage…

Answer 10

you can produce more output (gains from trade) with the same amount of input.

Question 11

specialization

Answer 11

when people focus on specific tasks, spending more of their time on what they’re relatively good at, and less of their time doing other stuff.

Question 12

Prices are…

Answer 12

signals, incentives, and a source of information

Question 13

prices are signals:

Answer 13

price increases:
- signal suppliers to supply more
- signal buyers to buy less

(vice versa)

Question 14

prices are incentives:

Answer 14

high prices:
- incentivizes suppliers to produce more
- incentivizes buyers to buy less

(vice versa)

Question 15

Prices provide incentives for…

Answer 15

strangers to cooperate.

Question 16

prices aggregate information:

Answer 16

The process of buying and selling aggregates information.
The price comes to represent what people think.

Question 17

Prediction market

Answer 17

markets whose payoffs are linked to whether an uncertain event occurs.

(you pay ___ for a $1 payout if you’re correct).

Question 18

Futures contract

Answer 18

where a buyer agrees to purchase a commodity like oil, wheat, etc. at a specific time in the future.

• This price of this is effectively a bet on the future price of a product.

Question 19

Inflation swaps

Answer 19

traders in a financial market bet on whether inflation will be high or low.

Price of these securities can be used as an inflation forecast.

Question 20

Internal markets

Answer 20

markets within a company to buy and sell scarce resources.

Question 21

Internal markets help…

Answer 21

your company to allocate scarce resources to better uses.

Setting up an internal market can avoid the knowledge problem.

Question 22

knowledge problem

Answer 22

when knowledge needed to make a good decision is not available to the decision maker.

knowledge may be may be so broadly dispersed that it’s not available to any individual decision maker.

Question 23

internal prediction markets

Answer 23

can provide accurate forecasts.