PART 2 Scarcity, Exchange and Efficiency

These flashcards cover key concepts in economics, particularly focusing on the themes of scarcity, production possibilities, efficiency, and exchange.

Scarcity

The limited availability of resources which imposes limits on what an economy can produce.

Production Possibility Frontier (PPF)

A curve that shows all the maximum feasible combinations of two goods that can be produced with available resources and technology.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision.

Production Function

A mathematical representation showing the relationship between different inputs and the amount of output produced.

Law of Diminishing Returns

A principle stating that adding more of one factor of production, while keeping others constant, will yield progressively smaller increases in output.

Efficient Production

Production that occurs on the Production Possibility Frontier, indicating the economy is utilizing all resources effectively.

Inefficient Production

Production that occurs inside the Production Possibility Frontier, where resources are not fully utilized.

Factor Endowment

The total quantity of factors of production available in an economy.

Technical Progress

Improvements in production techniques that increase the output produced from a given quantity of inputs.

Biased Technical Progress

Technological improvements that enhance productivity significantly in one sector over others, causing an asymmetric outward shift of the PPF.

Neutral Technical Progress

Technological advancements that increase productivity equally across all sectors, leading to a symmetric outward shift of the PPF.

Law of Increasing Opportunity Costs

The principle stating that as production of one good increases, the opportunity cost of producing an additional unit of that good also increases.

Exchange

The process by which goods are redistributed after production, affecting how total output is allocated among agents.

what is assumed for preferences

completeness, transitivity, more is better

Marginal rate of substitution

MRS = −dy/dx

absolute slope of the indifference curve / willingness to give up unit

mutually beneficial trades

trades that are beyond the indifference curve for both individuals

pareto efficient allocation

make one individual better off without making someone else worse off

the indifference curve are tangent

Marginal rate of transformation

MRT = dy/dx

shows how much you have to sacrifice A to increase another output