Business Economics: The Economic Way of Thinking and Gains from Trade

Vocabulary flashcards defining fundamental concepts of economics, opportunity cost, marginal analysis, trade dynamics, and comparative advantage based on lecture notes.

Economics

The study of consequences resulting from human decision making constrained by scarce resources.

Value (Net Benefit)

The net benefit derived from an action, calculated as $\text{Value} = \text{benefits} - \text{costs}$.

Opportunity Cost

The value of the second best alternative sacrificed when taking an action.

Sunk Cost

A cost that can never be recovered at all and should not influence further decision making.

Sunk Cost Principle

The principle stating that sunk costs are sunk and already spent costs should not influence any further decisions.

Marginal Cost

The additional cost of changing the actual situation by a small unit, including the opportunity cost of sacrificing the second best option.

Marginal Benefit

The additional benefit resulting from changing the actual situation by a small unit.

Optimal Decision

A decision where there is no reason to change it, not even by a small unit; its necessary condition is $MB = MC$.

Marginal Analysis

A decision-making method that involves repeatedly evaluating if it is worth changing the current situation by a small unit by comparing marginal benefit and marginal cost.

Fixed Cost

A cost that is independent of the actual decision to be made.

Voluntary Exchange

A mutually beneficial trade agreement between parties that creates a win-win situation.

Asymmetry of Valuations

The fundamental condition of trade where both parties sacrifice something less valuable to them in exchange for something more valuable.

Absolute Advantage

The ability to perform an activity in less time or using fewer resources than another party.

Comparative Advantage

The capacity to perform an activity or produce a good at a lower opportunity cost than another party.

Principle of Comparative Advantage

The principle that specialisation and trade exploiting comparative advantages creates wealth, whereas specialisation in the opposite direction makes both parties worse off.