WA2 — Economic Models & Trade

Vocabulary flashcards covering basic economic models, the production possibility frontier, trade advantages, and the distinction between positive and normative economics.

Model

A simplified representation of reality used to better understand real-life situations.

Other things equal assumption

The practice of holding all other relevant factors constant while studying one particular change.

Thought experiment

A simplified, hypothetical version of a real-life situation.

Production Possibility Frontier (PPF)

A model showing the maximum possible quantities of two goods an economy can produce, given its available resources and technology.

Efficient production

Economic state where the economy is using its resources as efficiently as possible, represented by points on the PPF.

Feasible but inefficient

Economic state where the economy could produce more of at least one good without giving up the other, represented by points inside the PPF.

Not feasible

Economic state where the economy currently doesn't have enough resources or technology to produce a specific combination, represented by points outside the PPF.

Efficiency in production

A condition in which an economy cannot produce more of one good without producing less of another.

Allocative efficiency

A state where resources are allocated so that consumers are as well off as possible by producing the right mix of goods.

Opportunity cost

What you must give up to get something else.

Increasing opportunity cost

The principle that as you produce more of a good, the cost in terms of other goods usually increases, resulting in a bowed-out PPF.

Economic growth

An expansion of an economy's ability to produce goods and services, represented by an outward shift of the PPF.

Factors of Production

The resources used to produce goods and services, consisting of land, labor, physical capital, and human capital.

Land

Natural resources used in production.

Labor

Workers used in the production process.

Physical capital

Machines, buildings, and equipment used to produce goods and services.

Human capital

The education, skills, and knowledge of workers.

Technology

The technical means used to produce goods and services.

Gains from trade

The benefits people or countries receive by specializing and trading with each other.

Absolute advantage

The ability of a person or country to produce more of a good than others using the same resources.

Comparative advantage

The ability of a person or country to produce a specific good at a lower opportunity cost than someone else.

Specialization

The practice of focusing on the production of a particular good where one has any comparative advantage.

Barter

The direct trading of one good or service for another.

Circular-flow diagram

A model showing how goods and services, factors of production, and money move through the economy.

Households

People who share income in the circular-flow model.

Firms

Organizations that produce goods and services and employ workers.

Goods & Services Markets

Markets where households buy products and money flows from households to firms.

Factor Markets

Markets where firms buy the resources needed for production, such as labor and capital.

Positive economics

Analysis of how the world actually works, dealing with questions that have objectively correct answers.

Normative economics

Analysis involving opinions, values, and judgments about how the world should work.

Forecast

A prediction of what will happen in the future.

Prescription

A recommendation stating what should be done based on value judgments.