Why make everything yourself when you can trade? Discover the language of efficiency, specialization and the gains that come from exchange.
These terms were extracted from Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria, eCampusOntario which is licensed under a Creative Commons Attribution 4.0 International License. Based on Principles of Microeconomics by OpenStax, licensed under CC BY 4.0.
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A position such that a person cannot be made better off without making someone else worse off.
If a person cannot be made better off without making someone else worse off, then this position is efficient.
A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.
This is noticeably different than equitable, where resources are distributed in a fair manner.
A position in such that a person can make at least one person better off without making someone worse off.
If a person can be made better off without making someone else worse off, then this position is inefficient.
An action done in an economy that harms no one and helps at least one person.
Such win-win’s also have a special classification: A Pareto Improvement.
A state of economic independence or self-sufficiency.
The island situation can be likened to a country with a policy of autarky – a state of economic independence or self-sufficiency.
A simplified framework that is designed to illustrate complex processes.
An economic model is a simplified framework that is designed to illustrate complex processes.
A solution that is ethically or legally just and fair, but may not be wholly satisfactory to any or all the involved parties.
This concept is called the Marginal Opportunity Cost of an action.
The ordering of alternatives based on their relative utility, a process which results in an optimal choice.
We mentioned before that preferences determine where you would produce.
A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
A Production Possibility Frontier (PPF) is the graphical representation of Figure 2.2a.
when one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country
To understand the benefits of trade, or why we trade in the first place, we need to understand the concepts of comparative and absolute advantage.
when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
To understand where these extra crabs come from, we must first explore the concept of comparative advantage.
a country that can consume more than it can produce as a result of specialization and trade
This is what we mean when we talk about gains from trade.
as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
This is known as the law of diminishing returns which states that as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline.
a method of production where one party focuses on the production of a limited group of products or services
This specialization in production results in gains from trade, as each person or country can focus on what it can produce at the lowest cost.