lec 3 part 5 Comparative Advantage, Specialization, and Trade

Vocabulary practice cards focusing on economic principles of comparative advantage, transaction costs, and wealth creation through specialization and trade.

Comparative Advantage

The ability of an individual or entity to produce a good or service at a lower opportunity cost compared to others.

Wealth

Whatever people value, including both material items and non-material benefits.

Production Possibility Frontier (PPF)

A boundary representing the maximum combinations of products an individual can produce; consumption outside this limit is achieved through specialization and trade.

Specialization

A synonym for following one's comparative advantage by identifying a specific task and engaging all resources in that activity.

Gains from Trade

The increase in consumption beyond an individual's own production possibility frontier that occurs when individuals specialize and exchange goods.

Law of Comparative Advantage

The principle that producers specialize to expand their possibilities by trading for items that are relatively costlier for them to produce individually.

Double Coincidence of Wants

The condition required for direct exchange where one party has what another wants and vice versa.

Transaction Costs

The costs involved in arranging contracts and agreements that facilitate trade among interested parties.

Middlemen

Individuals or entities that specialize in information to reduce transaction costs and generate value for buyers and sellers.

Division of Labor

The organization of labor where individuals specialize in different tasks, leading to increased production and economic growth.

Economic Growth

The expansion of whatever people value, occurring as a consequence of the evolution of commercial society.

Good

A commodity or service where more is preferred to less.

Bad

A commodity or service where less is preferred to more, such as rotten oranges.

Scarce Good

A good that is limited and involves an opportunity cost, meaning its acquisition requires some form of sacrifice.

Absolute Advantage

The ability to produce a value or good at a lower absolute cost than another producer.

Cooperative Interaction

The remarkable order observed in society that emerges as a result of people pursuing comparative advantages and participating in exchanges.