Chapter 2

Chapter 2 - agents in an economy can produce. (Graph 1)...

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Chapter 2: Efficiency, Exchange, and Comparative Advantage Terms: Goods- Something for which more is preferred to less. May be tangible items or a service Scarce goods: Can only be acquired by sacrificing some other good Free goods: Can be acquired without a sacrifice Wealth- Whatever people value. People value different things so wealth is created with trade. Opportunity Cost- The value of the next best alternative Efficiency: Allocative Efficiency- Goods in an economy are allocated in a way that maximizes the surplus of benefits over cost Productive Efficiency- Goods are produced at their lowest long run average cost Pareto Efficiency- An allocation is Pareto efficient if it is not possible to reallocate the goods so that at least one person is better off and no one else is worse off. No more win-win trades. Production Possibilities, Specialization, and Trade: Production Possibilities Frontier- A graph of the maximum combinations of output that
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Unformatted text preview: agents in an economy can produce. (Graph 1) Absolute Advantage- Belongs to the person that can produce more with a given amount of resources. Comparative Advantage- Belongs to the person that has the lowest opportunity cost of a task. The Law of Comparative Advantage- Output can be increased if people specialize in tasks where they have comparative advantage. For specialization to be effective than the people need to trade their stuff Chapter 3: Substitutes Everywhere, The concept of demand What is demand?: The relationship between the price of a good and the quantity demanded of the good The Law of Demand: The price of a good and the quantity demanded are inversely related, all other things held constant Not actually a law, it could theoretically be violated...
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This note was uploaded on 03/23/2012 for the course REL 1310 taught by Professor Holleyman during the Fall '08 term at Baylor.

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Chapter 2 - agents in an economy can produce. (Graph 1)...

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