let 3 part 2 Economics and the Wealth-Creating Power of Trade

These flashcards cover the fundamental vocabulary and concepts surrounding the economic theories of trade, wealth creation, and efficiency as presented in the lecture.

Aristotle

An ancient philosopher who wrote about household management and exchange, and is the source of the word economics.

Polyconomic

The historical term used in Aristotle’s writings that serves as the source for the modern word economics.

Fair trade

The historical idea that an exchange is only just if the objects traded are of equal value to reflect justice in trade.

Trade

The voluntary exchange of property rights or ownership rights between parties.

Voluntary

A key component of trade meaning the exchange is not coerced and is entered into by choice.

Coerced

The opposite of voluntary; an exchange involving force or threats, such as holding a gun to someone's head, which does not constitute trade.

Unequal values

The prerequisite for voluntary trade; if objects were of equal value to both parties, there would be no motivation to exchange them.

Wealth creation

The outcome of trade where both parties involved in a voluntary exchange feel they have more value than they did before the exchange.

$$v_1r > v_1s$$

The notation representing that for Dude 1, the value ($v$) of the rock ($r$) is greater than the value of the stick ($s$).

Opportunity cost

The value placed on whatever is sacrificed to obtain a good, such as the stick Dude 1 gives up to get the rock.

Efficiency

In economics, the comparison of the ratio of the value of the output to the value of the input: $\frac{\text{Value of Output}}{\text{Value of Input}}$.

Economic efficiency

A subjective concept based on an individual's own valuations where a process is efficient if the gained value exceeds the sacrificed value.

Increased efficiency

A state achieved by getting more output for less input, the same output for lower input, or more output for the same input.

Production of values

A broad definition of production in economics referring to the creation of wealth or happiness rather than just material goods.

Value of input

The total opportunity cost or value of everything sacrificed (time, money, or alternatives) to obtain a specific output.