PS 6/7 Econ Terms

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and technology.

Comparative Advantage

The ability of an individual, firm, or country to produce a particular good at a lower opportunity cost than its competitors.

Specialization

Focusing production on a single good or activity—typically the one in which an actor holds a comparative advantage—to maximize total output and efficiency.

Efficiency (Economic Efficiency)

A situation where resources are allocated in the most effective manner possible, meaning it is impossible to produce more of one good without producing less of another (on the PPF).

Autarky

A state of national self-reliance and economic independence where a country does not engage in international trade with other countries.

Consumer Surplus (CS)

The monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.

Producer Surplus (PS)

The amount that producers benefit by selling at a market price that is higher than the minimum price that they would be willing to sell for.

Total Surplus (TS)

The sum of consumer surplus and producer surplus, representing total net benefit to society from market exchange.

Subsidy

A financial payment or tax break made by the government to producers or consumers to encourage the production or consumption of a given good

Deadweight Loss (DWL)

A loss of total economic efficiency (total surplus) that occurs when the equilibrium outcome is not Pareto optimal or is distorted by taxes, subsidies, or artificial market restrictions.

Elasticity of Demand (Point Elasticity of Demand)

A measure of the responsiveness of the quantity demanded of a good to a change in its price

Present Value (PV):

The current value of a future stream of payments or cash flows, discounted back at a given interest rate

Economic Rent (Economic Profit):

Any payment to a factor of production (or the owner of a scarce permit/resource) in excess of its opportunity cost.

Government-Restricted Entry

A market barrier where the government limits the number of active firms or vendors via permits, licenses, or quotas, which can artificially restrict output and inflate prices/rents.