Krugman Microeconomics: Economic Models, Trade-offs and Trade

Flashcards covering key vocabulary from the lecture on economic models, trade-offs, and trade, including concepts like PPF, opportunity cost, comparative advantage, and the circular-flow diagram.

Economic Model

A simplified representation of a real situation used to better understand real-life situations.

The other things equal assumption

The assumption that all other relevant factors remain unchanged in an economic model, allowing only one variable to change at a time.

Production Possibility Frontier (PPF)

A diagram that shows the combinations of two goods that are possible for a society to produce at full employment.

Efficiency

An economic state where there are no missed opportunities, meaning resources are used optimally.

Opportunity cost

What must be given up in order to get a good or achieve a desired outcome.

Efficiency in production

The condition where an economy could not produce more of any one good without producing less of something else; being on the PPF.

Inefficient in production

The condition where an economy could produce more of some things without producing less of others.

Efficiency in allocation

The condition where an economy allocates its resources so that consumers are as well off as possible.

Increasing opportunity cost

The phenomenon where the more of a good an economy produces, the more costly it is to produce yet another unit in terms of foregone alternative goods.

Economic growth

An expansion of the economy’s production possibility, allowing it to produce more of all goods and services.

Factors of production

Resources used to produce goods and services, including land, labour, physical capital, and human capital.

Technology

The technical means for producing goods and services, which can contribute to economic growth if improved.

Theory of comparative advantage

The economic principle that it makes sense to produce things you're relatively better at producing and to buy everything else from others.

Comparative advantage (country)

When a country's opportunity cost of producing a good or service is lower than for other countries.

Comparative advantage (individual)

When an individual's opportunity cost of producing a good or service is lower than for other people.

Absolute advantage

The ability to produce more of a good or service than others, using the same amount of resources; distinct from comparative advantage which focuses on opportunity cost.

Barter

Direct exchange of goods or services that people have for goods or services that they want, without the use of money.

Circular-flow diagram

A model that represents the transactions in an economy by flows of goods, services, and money around a circle.

Household

A person or a group of people that share their income and consume goods and services.

Firm

An organization that produces goods and services for sale.

Markets for goods and services

Marketplaces where firms sell their produced goods and services to households.

Factor markets

Marketplaces where firms buy the resources (factors of production) they need to produce goods and services.

Income distribution

The way in which total income in an economy is divided among the owners of the various factors of production.

Positive economics

The branch of economic analysis that describes the way the economy actually works, focusing on factual statements.

Normative economics

The branch of economic analysis that makes prescriptions about the way the economy should work, involving value judgments.