Microeconomics-International Trade & The Profit Motive

Production Possibility Frontier

graph showing how many of two products an economy can produce

Absolute Advantage

to be able to produce more of a good than others given the same amount of resources

Comparative Advantage

to have a lower opportunity cost to produce a certain product

Exporters

country’s cost of supply is below the world price

Equilibrium with International Trade

occurs where the world price intersects a country’s market supply curve

Effects of exporting on surplus

consumer surplus falls because price rises while producer surplus increases; overall social welfare increases

Effects of importing on surplus

social welfare increases, consumers benefit, producers suffer losses

Firm

economic actors who are responsible for supplying goods and services

Total revenue

total quantity of output produced for sale multiplied by the price it receives

Economic costs

includes opportunity costs of all resources required for production

Accounting costs

includes only actual monetary expenditures

Fixed costs

costs that do not depend on the quantity produced and cannot be changed in the short run

Variable costs

costs that can be varied in the short run

Marginal cost

increase in costs that occurs when producing an additional unit of output; increase in total costs divided by increase in quantity produced

Diminishing returns to scale

increasing marginal costs as output increases; use of more resources produces less and less additional output

Marginal revenue

the additional revenue a supplier receives from producing an additional unit of output

Addition of producers

shifts market supply curve to the right, causes equilibrium price to fall

Entry of producers into a market

continues as long as there are positive economic profits to be earned in a market, stops when economic profits reaches zero

Exit of producers in a market

happens when economic profits fall below zero

Economic profits in a competitive market

producers earn zero economic profits, but do earn their opportunity wage

Allocation of productive resources

if prices exceed production costs in one activity, positive economic profits signals that additional resources should be deployed to increase production