| Pareto effect | economists focus on Pareto efficiency in evaluating the effectiveness of alternative economic systems. an allocation is Pareto efficient if there is no alternative that keeps all individuals at least well off but makes at least one person well off. |
| property right | a legally enforced right to select the uses of an economic good. a property right is private when it is assigned to a specific person. private property rights are alienable in that they can be transferred (sold or given) to another individual. |
| gains from trade | trade takes place because the buyer places a higher value on the item than the seller. the corresponding gains from trade make both parties better off - voluntary trade is mutually advantageous. |
| absolute advantage | it takes fewer hours to produce either a pound of meat or a quart of beer. |
| comparitie advantage | lower opportunity cost. total output and standards of living often increase when individuals specialise in production activities for which they have a comparative advantage. |
| externalities | externalities exist when the actions of one party affect the well-being or production possibilities of another party outside the exchange relationship. |
| coase theorem | property rights should be assigned and exchangeable to achieve efficiency as long as contracting costs are sufficiently low and the property rights are assigned clearly. |
| consumer surplus | the difference in what a consumer is willing to pay for a product and what the consumer actually pays when buying it. |
| producer surplus | the difference between the amount a producer fo a good receives and the minimum amount the producer is willing to accept for the good. |
| market vs. central planning | market: the price system motivates better use of knowledge and information in economic decisions, and it provides stronger incentives for individuals to make productive decisions. |
| general knowledge | inexpensive to transfer. |
| specific knowledge | expansive to transfer |
| scientific knowledge | knowledge of how recombinant DNA works is not easily transferred to non-scientists. |
| assembled knowledge | an account who has completed a client's tax returns for several years is likely to have assembled important knowledge about the relevant parts of the tax code. |
| contracting costs | a primary set of costs of using markets for exchange involves the discovery and the negotiation of prices. |
