Interdependence & Gains From Trade
Define Absolute Advantage.
The ability to produce a good using fewer inputs than another producer.
What does the Production Possibilities Frontier show?
the combinations of output an economy can possibly produce.
Describe Perfect Competition
Many Sellers
Identical Procuct
Price Takers
Low Barriers to Entry
Define Quantity Demanded.
Amount of a good that buyers are willing and able to
purchase.
Define Quantity Supplied.
Amount of a good sellers are willing and able to sell.
Define Comparative Advantage
The ability to produce a good at a lower
opportunity cost than another producer
Production is inefficient without trade if it is ________ the PPF.
inside
Describe Monopolistic Competition
Many Sellers
Product Differentiation
Non-Price Competition
What is the law of demand?
All other things being equal, When the price of a good rises, the quantity demanded of the good falls.
What is the law of supply?
All other things being equal, when the price of a good rises, the quantity supplied
of the good also rises.
Define Specialization.
the process wherein a company or individual decides to focus their labor on a specific type of production.
Production is efficient without trade if it is ________ the PPF.
on
Describe an Oligopoly
Few Sellers
Dominate Market
High Barriers to Entry
How do Substitutes and Complements affect demand?
+ Price of Substitute = + in demand for the other
+ in price of Complement = - in demand for other
Explain how input prices and technology affect supply.
Input prices
– Higher input prices: decrease in supply
• Technology
– Advance in technology: reduces firms’ costs:
increase in supply
The party with the _____ opportunity cost should produce a good.
lower
Production is unattainable without trade if it is ________ the PPF.
beyond
Natural Monopoly occurs when a single firm produces a product or provides a service because it has the ability to produce significantly more efficiently than potential competitors or has a significant head start in the market
Geographic Monopoly occurs when the location cannot support two or more such businesses
What is a Normal Vs Inferior Good?
Explain how expected higher prices and an increased number of sellers affects supply.
Expected higher prices = Decrease in current supply
Increase in # of sellers = Market supply increases
The price of a trade should be between two parties ______.
Opportunity Costs
According to the PPF a country should trade if the deal puts their output _____ their PPF.
beyond
Describe a Technological and Government Monopoly.
Technological Monopoly occurs when a producer has the exclusive right through patents of copyrights to produce a product or sell a particular product.
Government monopoly occurs when the government passes certain laws reserving the right for a specific trade.
Explain how expectations about income and prices affect demand?
Expect an increase in income
• Increase in current demand
Expect higher prices
• Increase in current demand
Explain what Equilibrium is and how a surplus and shortage effect it.
The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into
balance