Midterm 2 Flashcards
(30 cards)
Why do People Exchange, according to Adam Smith?
Lec 5
The human propensity to truck, barter, and exchange
something inherent in human nature that compels us to do this
How much does Chris value an apple?
Chris and Pat (Lec 5)
Trick Question! - can’t be answered
This is an implication of subjective theory of value.
What is the rule of law?
Lec 5
A peaceful and cooperative outcome where one offers something in exchange for another.
Define consent in an exchange?
Lec 5
when one gives permission to exchange one’s property
What is the Price of an orange?
Chris and Pat (Lec 5)
=an exchange ratio
1 orange for 1 apple
Describe Direct Exchange / Barter
Lec 5
A voluntery exchange where participants implicitly agree to abide by certain rules
- have a peaceful exchange
- consent
Define Commodity?
+ how does a a good become a commodity?
(Lec 5)
= something produced by someone with a plan to offer it in exchange with another - a plan to help other
- a neutral / good thing
-there is nothing sinister in something being a commodity
a good becomes a commodity because of
Define the Process of social learning.
Lec 5
= learning to interact peacefully and beneficially with other people
= the action of anticipating a future exchange
-learned that they can improve each other’s lives by social cooperation through exchange
“if 1 person wants this fruit, maybe mroe do”
True / False
If a commodity is more marketable, it has higher transaction costs
(Lec 5)
False.
If a commodity is more marketable. it has lower transaction costs.
What is the most marketable commodity?
+ Why?
(Lec 5)
Money.
- it’s divisible
- high value relative to mass
= low transaction costs
Define Indirect Exchange
Lec 5
= something that starts as a commodity that were produced for other purposes
what is “the most important invention that no one invented”?
(Lec 5)
A medium of exchange (aka money)
What 2 things does the theory of the origin of money teach us?
(Lec 5)
1) the emergence of money was a natural evolutionary organic social institution
- not invented by any 1 individual / group
2) money came into existence b/c it was more convenient than direct exchange / barter
- use fewer valuable resources
Describe Wealth.
=a/o subjective value
-doesn’t consist in material possessions
opportunity cost
- gain something they value more by exchange of what they value less
- both increase in wealth
- quantities of material objects stayed the same
How is wealth created?
Social cooperation by voluntary exchange creates wealth
What is smith’s thought on wealth?
“wealth consists of material possessions”
=a misunderstanding
Describe Comparative advantage
= people aren’t identical = different preferences
-rests on the concept of opportunity cost
=the value that a person attaches to the next best alternative action
=varies across individuals
- specialization leads to differentiated knowledge
=we have different values attached to what they are giving up
Define Absolute advantage
when you are the better person to produce than another
How do you calculate opportunity cost?
eg. 10 apples or 9 oranges
to produce 10 apples, you need to give up 9 oranges
10 apples / 9 oranges
= 1.1 apples
-divide 1 number by the other
Define comparatice advantage
-specializing by the person with the lowerest opportunity cost, the person who gives up the least specializes in producing that thing.
What is efficiency?
Trick question!
it depends on values and purposes
Define Technical efficiency.
input used per unit of output
eg. fuel consumption
Define Economic efficiency.
-what we value determines if something is economically efficient / inefficient
What does exchange involve according to Spanish Scholastics and Menger 1871
It involves unqual and asymmetric valuations
