Week 1 - Gains From Trade

Question 1

Economics is the study of ___

Answer 1

Scarcity

Question 2

What is Scarcity?

Answer 2

Study of how people use resources and respond to incentives + decision making

Question 3

Issues that need to be addressed in the economy

Answer 3

1) What to Produce
2) Who should Produce
3) Who should get what is made

Question 4

Economy questions are usually resolved in a ___

Answer 4

Market

Question 5

What is a Market?

Answer 5

Place where buyers and sellers of particular goods and services meet

Question 6

Under Scarcity, every choice involves a trade-off or ___

Answer 6

Opportunity Cost

Question 7

Opportunity Costs involve both ___ and ___

Answer 7

Explicit and Implicit Costs

Question 8

What are explicit costs?

Answer 8

Costs involving direct payments

Question 9

What are implicit costs?

Answer 9

The value of opportunities foregone

Question 10

What are sunk costs?

Answer 10

Costs that are not relevant

Question 11

What is a marginal benefit?

Answer 11

The additional benefit received from consuming an extra unit of something = Change in TB/Change in quantity

Question 12

What is a marginal cost?

Answer 12

The additional costs incurred through buying one more unit of something

Question 13

How to compare MB with MC of an activity?

Answer 13

If MB > MC, agent is better off doing the activity.
If MB < MC, agent is worse off if they do the activity.

Question 14

What is Correlation?

Answer 14

Association between 2+ factors, factors observed to be increase/decreasing together or moving in opposite directions

Question 15

What is Causation?

Answer 15

A change in variable brings about, or causes, a change in another variable

Question 16

Does Correlation imply a Causation?

Answer 16

No, they do not

Question 17

What is the theory of Ceteris Paribus?

Answer 17

To isolate the impact of one factor, hold other relevant variables constant

Question 18

What is a Production Possibility Frontier?

Answer 18

A graph that shows the output that an individual (or country) can produce with a particular set of resources

Question 19

Key factors of a PPF

Answer 19

1) Shows combination given resources and current technology
2) Can describe the individuals consumption choices
3) Shape change = Resources or Technology changes
4) Slope of graph is opportunity cost of producing an additional unit in terms of other unit

Question 20

Point meaning on PPF

Answer 20

1) On line = Efficient
2) Inside = Inefficient
3) Outside = Infeasible

Question 21

What is a trade?

Answer 21

An economic interaction helping allocate goods to those who value them most (gains from exchange)

Question 22

What is it called if both agents of a trade are better off?

Answer 22

Pareto Improving

Question 23

An exchange is usually ___

Answer 23

Voluntary

Question 24

A higher price suits the ___, a lower price suits the ___

Answer 24

Seller, Buyer

Question 25

Trading allows people to take advantage of ____

Answer 25

Gains from Specialisation, reducing overall costs of producing and increasing output

Question 26

A smaller ____ states that a person is more specialised to that task

Answer 26

Opportunity Cost

Question 27

What is an Absolute Advantage?

Answer 27

If a party can produce a greater number of that good compared to the other party

Question 28

What is a Comparative Advantage?

Answer 28

If a party’s opportunity cost of producing that good is lower than the other party

Question 29

What does gains from trade ensure?

Answer 29

That each person specialises in the good in which they have a comparative advantage (with lower opportunity costs)

Question 30

Why is it impossible for a person to have a comparative advantage in both goods?

Answer 30

Because an opportunity cost calculation is the inverse for the other good