Sunday, January 13, 2008

Economic Theory

Relationship between Science - Fact - Theory

Science is the process of organizing, collecting and explaining facts.

Fact is something group of people agree upon.

There are infinite amount of facts.

Interrelationship of two facts is called theory.

1. Scarcity and Economic Costs

What is Competitive Advantage?

What is asolute Advantage?


Problems of empirical Verification - Environment cannot be controlled.

2. Gains to Specialization and Exchange

Production Possibility Frontier

A graph of production possibilities is called Production Possibility Frontier.

The production possibility frontier defines various production opportunities available open to an individual or an economy given full employment resources and existing technology.

Marginal Cost of a good or activity is the amount of other goods that must be foregone to obtain one or more unit of the good.

Comparitive Advantage and Gains to Trade

Absolute Advantage -
If an individual can produce more than others in the same time or produce the same in less time.

Comparative Advantage - An Individual has an comparative advantage if he can produce goods at a lower cost than others.

Gains to Specialization in Production and Exchange

By Concentrating ones own production by Comparitive advantage and exchanging the production with least comparitive advantage one would achieeve production Efficiency.

Production Efficiency is achieved at least cost.

The entire process of Economic Growth is essentially a process of pushing outward the boundaries set by the production possibility frontier.

Production Possibility Curve cannot answer-
What it is to be produced and who receives the outpu.

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