Exchange and Opportunity Cost Flashcards
Consumer’s Surplus
A measure of the gains from trade to consumer. Different between what you’re willing to pay and what you have to pay
Seller/Producer Surplus
Seller’s surplus is the profit of the seller.
Theorem of Exchange
all gains of trade are exhausted at the margin (maximized –> efficiency)
Efficiency
Efficiency means producing the maximum amount of output with minimum inputs (resources such as labor, capital, and raw materials)
Pareto Optimality
Situation can’t be changed without making someone worse off
Pareto Improvement
At least 1 person is made better off, no one is worse off
Market Demand
Market demand describes the demand for a given product and who wants to purchase it (downward sloping)
Market Supply
Market supply refers to the total quantity of a good or service that all producers in a market are willing and able to sell at a given price. (upward sloping)
Equilibrium Price & Quantity
quantity demanded = quantity supplied
Deadweight Loss
when supply and demand are out of equilibrium
Opportunity Cost
the value of the highest forsaken alternative
Broken Window Fallacy
when a window breaks and someone spends money to repair it, he or she has created new economic activity that would not have otherwise taken place
Profits (losses)
benefits - costs = P
Profits are maximized when you choose the most valuable option
Sunk Costs
Costs than can’t be recovered (lecture seats at SFU)
Avoidable Costs
Opportunity costs that aren’t sunk; they can be recovered or avoided
Transaction Costs
Cost that arises when you try to cheat one another in an exchange (shoplifting)
Fixed Costs
Costs that don’t change without output (independent)
Variable Costs
Changes when output changes
Absolute Advantage
You are more productive in all activities
Comparative Advantage
You are the least cost producer
Marginal Cost Curve
supply curve of producers
Production Possibility Curve shows us
The max amount of both goods this little economy can produce
Marginal cost curves upward sloping
Because individuals have different costs of production
Area under marginal cost curve
total costs
Rent
Seller’s surplus : revenue cost. An amount that could be taken away from the producer and the same output would still be produced
Rent on marginal unit produced is 0, and is where production _____
stops (producers maximized surplus)
