Econ 101: Chapter 8 Flashcards
Gains from trade
the benefits that come from reallocating resources, goods, and services to better uses.
Money is…
a convenience that allows you to engage in more complicated trades.
absolute advantage
the ability of one person to do a task using fewer inputs that someone else.
absolute advantage tells you…
who’s best at a task, but not who should do the task.
Comparative advantage
the ability to do a task at a lower opportunity cost.
Comparative advantage is about…
allocating resources to their better uses.
opportunity cost of a task =
hours this task takes/ hours it takes to produce alternative output.
Does everybody have a comparative advantage?
Yes. Even if they don’t have an absolute advantage in anything.
Steps to identify who has a comparative advantage in what:
- Determine how long each task takes per person
- Calculate the opportunity cost
- assess who has the lowest opportunity cost of each task.
Due to comparative advantage…
you can produce more output (gains from trade) with the same amount of input.
specialization
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.
Prices are…
signals, incentives, and a source of information
prices are signals:
price increases:
- signal suppliers to supply more
- signal buyers to buy less
(vice versa)
prices are incentives:
high prices:
- incentivizes suppliers to produce more
- incentivizes buyers to buy less
(vice versa)
Prices provide incentives for…
strangers to cooperate.
prices aggregate information:
The process of buying and selling aggregates information.
The price comes to represent what people think.
Prediction market
markets whose payoffs are linked to whether an uncertain event occurs.
(you pay ___ for a $1 payout if you’re correct).
Futures contract
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.
Inflation swaps
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.
Internal markets
markets within a company to buy and sell scarce resources.
Internal markets help…
your company to allocate scarce resources to better uses.
Setting up an internal market can avoid the knowledge problem.
knowledge problem
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.
internal prediction markets
can provide accurate forecasts.
