The Production Possibility Model, Trade, and Globalization

Vocabulary flashcards covering the production possibility model, comparative advantage, efficiency, trade, and globalization concepts.

Production possibility curve

A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs.

Comparative advantage

The ability to be better suited to the production of one good than to the production of another.

Slope of the production possibility curve

Measures the trade-off between the cost of one good in terms of another.

Principle of increasing marginal opportunity cost

The principle stating that opportunity costs increase the more you concentrate on an activity.

Comparative Advantage and the Production Possibility Curve

As you move down along the production possibility curve from point A to point B, the cost of producing guns increases because resources less suited for gun production are being used.

Productive efficiency

Achieving as much output as possible from a given amount of inputs or resources.

Inefficient points (PPC)

Points inside the production possibility curve where it is possible to obtain more of one good without giving up any of the other.

Efficient points (PPC)

Points located along the production possibility curve representing maximum achievable combinations of outputs.

Unattainable points (PPC)

Points located outside the production possibility curve that cannot be reached given existing technology, resources, and labor force.

Efficiency, Inefficiency, and Technological Change

Illustrates efficient points on the frontier, inefficient points inside, unattainable points outside (a), neutral technological change shifting the entire curve (b), and biased technological change shifting one side of the curve (c).

Neutral technological change

A technological improvement that increases efficiency in the production of both goods, shifting the entire production possibility curve outward.

Biased technological change

A technological improvement that increases efficiency in producing one good while leaving the production capacity of the other good unchanged.

Laissez-Faire

An economic policy of leaving the coordination of individuals' actions to the market.

Globalization

The increasing integration of economies, cultures, and institutions across the world.

Law of one price

States that the wages of workers in one country will not differ significantly from the wages of equal workers in another institutionally similar country.