Part 1 Flashcards
Inputs/factors of production
Resources, land, labor, and capital used by firms to produce output
Costs
The wages and rents firms must pay in order to purchase land, labor, and capital needed to manufacture goods
Outputs
Finished goods and services firms produce to maximize profit
Product market
Where outputs go to be sold to consumers and generate revenue for a firm
Total Product
Total quantity of output produced by a firm
Average Product
Quantity of total output produced per unit of input
Average product formula
Total product/number of inputs
Marginal Product
Quantity of total output produced by each additional unit of input used in the production process
Marginal product formula
Change in total product/change in outputs used
Law of diminishing returns
As variable resources are added to fixed resources during the production process, additional output will eventually fall
Increasing Marginal Returns
Each additional worker is more productive than the previous one (the firm increases at an increasing rate)
Decreasing Marginal Return
Each additional worker is less productive than the previous one, because each worker finds it harder to specialize in their task
Negative Marginal Returns
Each additional worker gets in the way of production; we see negative marginal returns
relationship between marginal and total product
When the marginal product curve is rising, te total product curve is rising at an increasing rate.
When the marginal product curve reaches its apex, the total product curve stops rising at an increasing rate.
When the marginal product curve begins to fall, the total product curve begins to rise at a slower rate
By the time the marginal product curve hits 0, the total product curve reaches its apex
Only when the marginal product curve becomes negative does the total product curve begin to fall
Comparative Advantage
Circumstance where a nation/firm/individual has a lower opportunity cost than another entity when producing the same amount of the same product.
Absolute Advantage
An entity can make more of one good than another given the same amount of time.
Law of Comparative Advantage
Each person should produce the good for which there is a lower opportunity cost than other producers
Opportunity Cost
The loss of potential gain from other alternatives when one alternative is chosen
Absolute Advantage
When an entity is able to produce more goods using fewer inputs
Why do countries trade?
- Differences in technology
-Differences in amount of factors of production/resources
-Differences in the costs of offshoring (assembling parts of a good in different countries and then assembling it in a final location)
-Proximity of countries to each other
Ricardian Model Key Assumptions
1) Perfect competition
2 Perfect labor markets
Perfect Competition
Many consumers and many producers
Price of one additional unit of a good equals the cost of producing that unit
Perfect Labor Markets
Labor is mobile across sectors but immobile across countries (no migration)
Total Product Curve
Shows the relationship between the amount of input to create a product versus the output
