Week 1 - Gains From Trade Flashcards
Comparative Advantages + Gains from Trade
Economics is the study of ___
Scarcity
What is Scarcity?
Study of how people use resources and respond to incentives + decision making
Issues that need to be addressed in the economy
1) What to Produce
2) Who should Produce
3) Who should get what is made
Economy questions are usually resolved in a ___
Market
What is a Market?
Place where buyers and sellers of particular goods and services meet
Under Scarcity, every choice involves a trade-off or ___
Opportunity Cost
Opportunity Costs involve both ___ and ___
Explicit and Implicit Costs
What are explicit costs?
Costs involving direct payments
What are implicit costs?
The value of opportunities foregone
What are sunk costs?
Costs that are not relevant
What is a marginal benefit?
The additional benefit received from consuming an extra unit of something = Change in TB/Change in quantity
What is a marginal cost?
The additional costs incurred through buying one more unit of something
How to compare MB with MC of an activity?
If MB > MC, agent is better off doing the activity.
If MB < MC, agent is worse off if they do the activity.
What is Correlation?
Association between 2+ factors, factors observed to be increase/decreasing together or moving in opposite directions
What is Causation?
A change in variable brings about, or causes, a change in another variable
Does Correlation imply a Causation?
No, they do not
What is the theory of Ceteris Paribus?
To isolate the impact of one factor, hold other relevant variables constant
What is a Production Possibility Frontier?
A graph that shows the output that an individual (or country) can produce with a particular set of resources
Key factors of a PPF
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
Point meaning on PPF
1) On line = Efficient
2) Inside = Inefficient
3) Outside = Infeasible
What is a trade?
An economic interaction helping allocate goods to those who value them most (gains from exchange)
What is it called if both agents of a trade are better off?
Pareto Improving
An exchange is usually ___
Voluntary
A higher price suits the ___, a lower price suits the ___
Seller, Buyer
Trading allows people to take advantage of ____
Gains from Specialisation, reducing overall costs of producing and increasing output
A smaller ____ states that a person is more specialised to that task
Opportunity Cost
What is an Absolute Advantage?
If a party can produce a greater number of that good compared to the other party
What is a Comparative Advantage?
If a party’s opportunity cost of producing that good is lower than the other party
What does gains from trade ensure?
That each person specialises in the good in which they have a comparative advantage (with lower opportunity costs)
Why is it impossible for a person to have a comparative advantage in both goods?
Because an opportunity cost calculation is the inverse for the other good
