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28 Cards in this Set
- Front
- Back
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PPC |
Captures the maximum output combinations of two (or more) goods, given a set of inputs (i.e. time) is used efficiently. |
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Efficient Production Point |
Represents a combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other. - All points on the PPC are efficient. |
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Inefficient Production Point |
An Inefficient Production Point represents a combination of goods for which currently available resources allow an increase in the production of one good without a reduction in the production of the other. - All the points below and to the left of the PPC are inefficient. |
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Attainable Production Point |
An Attainable Production Point represents any combination of goods (bananas and rabbits) that can be produced with the currently available resources (Alberto’s time). - All the points on the PPC or below and to the left of the PPC are attainable. |
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Unattainable Production Point |
An Unattainable Production Point represents any combination of goods that cannot be produced with the currently available resources. - All the points that lie outside of the PPC are unattainable. |
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Absolute Advantage |
An agent (or an economy) has an Absolute Advantage in a productive activity when he/she can carry on this activity with less resources (i.e., less time) than another agent. |
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Opportunity Cost |
The value of the next best alternative to that particular action. - Calculated by: Alternate Cost (Loss) / Chosen Cost |
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Comparative Advantage |
An agent (or an economy) has a Comparative Advantage in a productive activity when he/she has a lower opportunity cost of carrying on that activity than another agent. |
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Principle of Comparative Advantage |
The Principle of Comparative Advantage states that everyone is better off if each agent (or each country) specialises in the activities for which they have a comparative advantage. |
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The Low-Hanging Fruit Principle (or Increasing Opportunity Cost) |
The Low-Hanging Fruit Principle (or Increasing Opportunity Cost) states that in the process of increasing the production of any good, one first employs those resources with the lowest opportunity cost and only once these are exhausted turn to resources with higher cost. |
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Factors hat will shift the PPC outwards |
1 . an increase in infrastructures such as factories, equipment, etc., 2 . an increase in population, and so in labour force, or 3 . advancements in knowledge and technology, via education, R&D, IT and communications technologies. |
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CPC |
Consumption Possibility Curve (CPC) shows all combinations of the two goods that the agents in the economy can consume - CPC is same as PPC in closed economy - CPC is usually greater as agents can usually trade for other goods and services (open economy) |
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Bow Shape of PPC |
As we increase the quantity of bananas produces, the PPC slope increases, meaning that the opportunity costs of collecting additional bananas (measured in terms of the corresponding loss in rabbits) also rises. |
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Assumptions |
- no psychological costs - no transaction costs - no import quotas/tariffs |
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Specialisation |
Implies acquiring a lot of expertise in performing a certain activity. This represents a sunk cost for a country (a cost incurred at the beginning of an activity that cannot be recovered in any way). |
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Market |
The Market for a given good or service is the set of all the consumers and suppliers who are willing to buy and sell that good or service. |
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Market Equilibrium |
Market Equilibrium occurs when the price and the quantity sold of a given good is stable. Alternatively, Market Equilibrium occurs when the equilibrium price is such that the quantity consumers want today is the same as the quantity suppliers want to sell. |
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Characteristics of Perfect Competition |
- Price Takers - Homogenous Product - Goods are excludable and rival - Full information - Free entry and exit |
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Consumers and Producers are Price Takers |
- Consumers suggesting a lower price will not be able to acquire the good, as suppliers will just serve someone else instead of lowering profit. - Suppliers can not charge a higher price, as consumers can purchase another good/from another supplier. |
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Externality |
An externality is a cost (or a benefit) that is incurred by (or accrued to) someone who is not involved in the production or consumption of a certain good. |
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Marginal Benefit |
The Marginal Benefit of producing a certain unit of a given good is the extra benefit accrued by producing that unit. |
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Marginal Cost |
The Marginal Cost of producing a certain unit of a given good is the extra cost of producing that unit. (Keep in mind here that the relevant cost is the “opportunity cost” and not just the “absolute cost” of producing the good. |
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Cost-Benefit Principle |
States that an action should be taken if the marginal benefit is greater than the marginal cost. Economic Surplus : The Economic Surplus of a certain action is the difference between the marginal benefit and the marginal cost of taking that action |
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Supply Curve |
The Supply Curve represents the relationship between the price of a good or service and the quantity supplied of that good or service |
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Law of Supply |
The Law of Supply describes the tendency for a producer to offer more of a certain good or service when the price of that good or service increases. |
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Horizontal Interpretation of the Supply Curve |
Start from a certain price and find the associated quantity on the supply curve. The quantity you found indicates how many units the producer is willing to supply at that price. |
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Vertical Interpretation of the Supply Curve |
Start form a certain quantity (say 2 units) and find the associated price on the supply curve. The price you found indicates the minimum amount of money the producer is willing to accept to offer the marginal unit (in our example the marginal unit would be the 2 nd unit). |
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Producer Reservation Price |
Producer Reservation Price denotes the minimum amount of money the producer is willing to accept to offer a certain good or service |
