Definitions Microeconomics Essay

Definitions – Microeconomics Absolute Advantage: Is when an agent has a productive activity and can carry on this activity with less resources than another agent. (More productive at producing one good.)
Opportunity cost: The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action. The slope of the PPC curve is the opportunity cost of bananas compared to rabbits.
Comparative Advantage: Is when an agent has a productive activity and has a lower opportunity cost of carrying this activity than another agent. The gains from specialisation grow larger as the difference in opportunity cost increases.
Specialisation: when a producer focuses on the production of one product that they can produce more of than another product in a certain period of time.
Supply Curve: represents the relationship between the price of a good or service and the quantity supplied (vary the price of apples to see how the supple of apples would change with it) of that good or service. Horizontally: start from a certain price and then use the supply curve to derive the quantity of goods that will be supplied at that price. Vertically: start from a given quantity, find the associated price on the supply -> the minimum amount of money the producer is willing to accept to supply the marginal unit of the good ==Producer reservation price
Production Possibility curve: represents all possible combinations of bananas and rabbits that can be produced with Alberto’s labour if he works all the available hours (if all inputs are used efficiently)
Consumption Possibility curve: represents all possible combinations of two goods that the agents in an economy can consume. (PPC vs. CPC) - international trade: two goods that the economy can feasibly consume when it is open to international trade (depends on international (world) prices)
Low hanging fruit
Principle of increasing opportunity cost: in the process of increasing the production (need to have resources available – capital/labour/technology) of any good, first employ those resources with the lowest opportunity cost and only once these are exhausted turn to resources with higher cost.
Market equilibrium: occurs when the price and the quantity sold of a given good is stable, or occurs when the equilibrium price is such that the quantity that consumers want today is the same as the quantity that suppliers want to sell.
Market: for a given good or service is the set of all the consumers and suppliers who are willing to buy and sell that good or service at a given price.
Marginal benefit: of producing a certain unit of a given good is the extra benefit accrued by producing that unit
Marginal cost: of producing a certain unit of a given good is the extra cost of producing that unit (the relevant cost is the ‘opportunity cost’ and not just the ‘absolute cost’ of producing the good.)
Cost benefit principle: states that an action should be taken if the marginal benefit is greater than the marginal cost
Economic surplus: of a certain action is the difference between the marginal benefit and the marginal cost of taking that action.
Quantity supplied: by a supplier represents the quantity of a given good or service that maximises the profit of the supplier.
Reservation price
Sunk cost: is a cost that once paid cannot be recovered (differentiate its cost – firm)
Fixed cost: is a cost associated with a fixed factor of production, which means the cost does not vary with the quantity produced for example rent.
Variable cost: is a cost associated with a variable factor of production, which means the cost tends to vary with the quantity produced example electricity or labour
Short run: is a period of time during which at least of one factor of production is fixed
Long run: is a period of time during which all factors of production are variable.
Profit: represents the difference between the total

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