Mod 2 Flashcards
Goal Orientated Behavior
Behavior of market participants interested in fulfilling their own personal goals
Rational Behavior
The behavior of market participants based on a careful, deliberate process that weighs expected costs/benefits
Explicit cost
Money used in pursuit of a goal that could have been spent on a different object
Implicit Costs
Foregone benefits from the use of time and other resources in pursuit of a goal
Opportunity Cost
Explicit cost + implicit cost
Value of what is foregone by choosing one option over another
Production Possibility Frontier
Depiction of all the different combinations of goods that a rational person with certain goals can attain with a fixed amount of resources
Absolute Advantage
Ability to produce more goods or services with a set of resources than another market participant
Comparative Advantage
Ability to produce a good or service at a lower opportunity cost per unit
Mutually Beneficial Bartering Price
The exchange rate is between opportunity costs
Benefits of Middleman (3)
Encourages specialization
Facilitates trade
Increases production
Why Trade? (4)
Individuals face scarcity and tech constraints
Individuals have different abilities
Produce more when focusing on advantage (higher GDP)
Both are better off with/ specialization and trading
Dealer
A market intermediary that always stands ready to buy from sellers at the bid price and sells to buyers at the asking price and takes the bid-ask spread as the per-unit profit
Bid Price
The price at which a dealer buys inventory
Ask Price
The price at which a dealer sells inventory
Dealer Opportunity Cost
Could be involved in trade somewhere else
Bid-Ask Spread
A dealer’s per-unit profit from buying low at the bid price and selling high at the ask price
Medium of exchange
An intermediary instrument used to facilitate the sale, purchasing, or trading of goods between parties
1 Determinant of Bid-Ask Spread
The number of competitors
Disadvantage of Barter (5)
Goods aren’t easily divisible (integer values)
Goods aren’t uniform
Have to expend resources to authenticate goods
Goods aren’t easily portable
Value of goods diminishes over time (quality)
Double Coincidence of Wants
Difficulty in barter economy where it is improbable that traders will find counterparties who have the desired goods at the correct time in the correct place
Store of Value
An asset that can be saved, retrieved, and exchanged at a later time, and can be predictably useful when retrieved
Unit of Account
A unit of measure used to value goods, services, and other economic items
Fungible
Individual units that are capable of mutual substitution (interchangeable)
Fiat Money
Currency that a government has declared to be legal tender, but has no intrinsic value and is not backed by a physical commodity
