Krugman Microeconomics: Economic Models: Trade-offs and Trade

Vocabulary flashcards covering key concepts from the lecture on economic models, trade-offs, and trade.

Model

A simplified representation of a real situation that is used to better understand real-life situations.

The other things equal assumption

The assumption that all other relevant factors remain unchanged when studying an economic phenomenon.

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; it cannot produce more of any one good without producing less of something else.

Efficient in production

When an economy is operating on its PPF, meaning it cannot produce more of one good without producing less of another.

Efficient in allocation

When an economy allocates its resources so that consumers are as well off as possible, aligning with society's preferences.

Opportunity cost

What must be given up in order to get a good; the true cost of any good.

Slope (of a curve)

A measure of how steep a curve is, indicating how sensitive the y-variable is to a change in the x-variable.

Increasing opportunity cost

The principle that as more of a good is produced, the more costly it is to produce yet another unit in terms of other goods forgone.

Economic growth

An expansion of the economy’s production possibilities.

Factors of production

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

Technology

The technical means available for producing goods and services.

Specialization

The act of focusing production on goods and services for which an individual or country has a comparative advantage.

Theory of Comparative Advantage

The principle that individuals or countries should produce the things they are relatively better at producing and buy everything else from others.

Comparative advantage

When an individual or country can produce a good or service at a lower opportunity cost than others.

Barter

A direct exchange of goods or services that people have for goods or services that they want, without the use of money.

Circular-flow diagram

A schematic representation of the transactions in an economy, showing flows of physical things and money around a circle.

Household

A person or a group of people that share their income and consume goods and services.

Firm

An organization that produces goods and services for sale.

Positive economics

The branch of economic analysis that describes the way the economy actually works, focusing on factual explanations.