Week 2 - Gains from trade & the competitive market

Question 1

What are Gains from trade

Answer 1

refer to the net benefits to all economic agents from entering in voluntary trade with each other

Question 2

When are Gains from trade possible (x3)

Answer 2

differences in opportunity cost:
1. diversity (heterogeneity) in the population
2. differences in tastes (preferences) for goods
3. differences in skills or production technology

Question 3

How should an economy allocate productive resources

Answer 3

Production of a good X should be allocated to agents (individuals, firms, countries) with the lowest opportunity cost first and the highest opportunity cost last

Question 4

What are the assumptions for Production Possibility Frontiers (x4)

Answer 4

1. only 2 goods are produced
2. factors of production/resource inputs are fixed (land, labour, capital, enterprise)
3. production technology for each good is fixed
4. all resources are fully and efficiently employed

Question 5

What is a PPF

Answer 5

A graph that depicts all possible combinations of output of two goods when resources and production technology are fully utilized
The PPF captures the concepts of scarcity, choice, and tradeoffs

Question 6

How do you calculate Opportunity cost from a schedule of bundles

Answer 6

OC = G1 - G1’ / G2 - G2’

Question 7

What does a curved PPF reflect

Answer 7

The law of diminishing marginal returns to production (increasing a FOP by one unit, while holding all other FOP constant, will return a lower unit of output per incremental unit of input)

Question 8

What is Absolute advantage

Answer 8

Absolute advantage indicates an economic agent (individual, firm, country) is the lowest cost producer of a good

Question 9

What is Comparative advantage

Answer 9

Comparative advantage indicates an economic agent (individual, firm, country) has the lowest opportunity cost of producing a good

Question 10

What is a Market and what are the conditions (x3)

Answer 10

A means of transferring goods and services from one agent to another, in markets:
1. Exchange is reciprocated
2. Exchange is voluntary
3. There is competition

Question 11

What is Equilibrium price

Answer 11

The price at which demand and supply schedules intersect (QD = QS), at this price the market clears

Question 12

What is the Law of demand

Answer 12

As the price of a good increases, ceteris paribus, the quantity demanded decreases

Question 13

What are Determinants of demand

Answer 13

Exogenous variables which we assume to be constant along the curve:
Population
Legislation
Advertising
Substitutes
Tastes and preferences
Income
Complements

Question 14

What is the Market demand function

Answer 14

QD = a - bP

Question 15

What are Determinants of supply

Answer 15

Exogenous variables which we assume to be constant along the curve:
Subsidies, taxation, regulation
Technology
Alternative products’ profitability
Resource costs
Size of the market

Question 16

What is the Market supply function

Answer 16

QS = c + dP

Question 17

What are the assumptions of a perfectly competitive market (x6)

Answer 17

1. A large number of buyers and sellers
2. homogenous goods/services
3. perfect information
4. no barriers to entry/exit
5. price takers
6. only normal profits in the long run

Question 18

Mathematically, what 3 equations describe an equilibrium

Answer 18

1. QD = a - bP (the demand schedule)
2. QS = c + dP (the supply schedule)
3. QS = QD (the market clearing condition)

Question 19

What are Comparative statics

Answer 19

The analysis of how a change in an exogenous variable (shift in demand/supply) in our model changes the equilibrium