Econ 101 Umich Exam 2 Caldwell

comparative advantage

when one producer can produce a good at a lower opportunity cost than another producer

-reason for specialization

absolute advantage

when one producer can produce more of a good than another producer in a certain period of time

Production Possibility Frontier

represents the possible combinations of goods that an economy can produce in a certain period of time

specilaization

requires sufficient ability to produce according to demand (must lies on or within PPF)

transportation costs also must be low enough

must be possible to exchange products and large enough market to consumer

efficiency

no way to produce more of one good without producing less of another good

opportunity cost

slope of the PPF- increasing if bowed outward because as more is produced, less suitable resources are used

economic growth

growth ability of economy to produce goods and services; an outward shift from the PPF sue to increases in factors of production and changes in technology

sources of comparative advantage

1. difference in climate

2. difference in factor endowments

3. difference in skill level of workers

4. difference in technology

domestic demand and supply curve

normal curves with name for when within country

world price

price at which the good can be bough or sold abroad

imports

if the Pw is lower than domestic price, trade leads to ___ and a fall in the domestic price towards the world price

effects of imports

net benefits increased for importing country because consumer gains exceed producer losses

exports

if the Pw is higher than the domestic price, trade leads to _ and a rise in the domestic price toward the world price

effects of exports

net benefits increase for exporting country because producer gains exceed consumer losses

free trade

when the government does not attempt either to reduce or increase the levels of exports and imports that occur naturally as a result of supply and demand

tariff

tax levied on imports that raises domestic price above Pw and results in a fall in trade and total consumption and a rise in domestic production

firm

an entity that converts inputs (land, labor, capital) into outputs (sold goods and services)

production

in order to maximize profits, the firm must produce a given quantity as efficiently as possible; getting most outputs from a set of inputs

the production function

describes the relationship between the quantities of inputs used and the maximum quantity of output that can be produced

Q=f(L,K)

total prodcut

total amount of product that factors of production create; increases with increases in amount of factors (to a point)

average product

ration of total output to number of inputs used to produce that output

Q/L or Q/K

marginal product

the change in output that occurs when one additional of input is added

Change in Q/ Change in L

short run

period of time is __ enough that at least one factor of production is fixed (usually capital)

long run

period of time is ___ enough that all factors of production can be varied

law of diminishing marginal product

as additional units of the variable input are added to fixed inputs, eventually the marginal product of the variable input will decline

total product curve

shows how the quantity of output depends on the variable input, for a given quantity of the fixed input (slopes upward, but slope decreases)

firm costs

dependent on technology available and price paid for factors of production

explicit costs

involves actually laying out money; accounting costs; direct out-of-pocket

implicit costs

no direct outlay of money; measured by the value in dollar terms of the benefits forgone

accounting profit

total revenue - explicit costs

economic profit

total revenue - opportunity cost (implicit + explicit)

sunk cost

incurred in the past that cannot be recovered regardless of current decision making

fixed cost

cost that does not depend on the quantity of output produced; expenditures on factors that are fixed in the short run; does not change with the output

variable cost

cost that does depend on the quantity of output produced; increases with increased output

total cost

total cost of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output

marginal factor cost

the additional cost to a firm from hiring one more unit of a factor

marginal cost

change in TC/ change in quantity of ouput

average fixed cost

fixed costs per unit of output shape determined by mC

average total cost

total cost per unit of output