Economic Models: Trade-offs and Trade

Flashcards of key vocabulary terms and definitions from the lecture notes on economic models, trade-offs, and trade.

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.

Production possibilities frontier (PPF)

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

Efficiency

An economy is efficient if there are no missed opportunities.

Opportunity cost

What must be given up in order to get a good.

Increasing opportunity cost

The more jets the economy produces, the more costly it is to produce yet another jet in terms of forgone subway trains.

Economic growth

An expansion of the economy’s production possibilities.

Factors of production

Resources used to produce goods and services (land, labor, physical capital, and human capital).

Technology

The technical means for producing goods and services.

Theory of Comparative Advantage

It makes sense to produce the things you’re especially good (relatively better) at producing and buy everything else from others.

Comparative advantage

A country has a comparative advantage in producing a good or service if its opportunity cost of producing the good or service is lower than for other countries.

Barter

When people directly exchange goods or services that they have for goods or services that they want.

Circular-flow diagram

Represents the transactions in an economy by flows around a circle.

Household

A person or a group of people that share their income.

Firm

An organization that produces goods and services for sale.

Markets for goods and services

Firms sell goods and services that they produce to households.

Factor markets

Firms buy the resources they need to produce goods and services.

Economy’s income distribution

The way in which total income 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.

Normative economics

Makes prescriptions about the way the economy should work.

Forecast

A simple prediction of the future.