Econ-Ch8

A price is

1. A signal 2. An incentive 3. A bundle of information

Inflation swaps

In financial markets, traders bet on whether inflation will be high or low, and so the price of these securities (they're called "inflation swaps") can yield useful inflation forecasts.

prediction markets

Markets whose payoffs are linked to whether an uncertain event occurs.

internal markets

Markets within a company to buy and sell scarce resources.

identifies who has a comparative advantage in each task

Step one: Determine how long each task would take each person (as in the top panel of Figure 1). This measures the cost of producing each good, in hours. Step two: Convert this into a measure of opportunity cost, by calculating how much of the alternative good you could have produced in that time. Step three: Evaluate who has a comparative advantage at each task by assessing who can produce each good at the lowest opportunity cost.

comparative advantage

The ability to do a task at a lower opportunity cost.

absolute advantage

The ability to do a task using fewer inputs.

gains from trade

The benefits that come from reallocating resources, goods, and services to better uses.

The knowledge problem

When knowledge needed to make a good decision is not available to the decision maker.

Futures

Where a buyer agrees to purchase a commodity like oil, wheat, or natural gas at a specific time in the future—is effectively a bet on the future price of these commodities. Businesses can look at these to obtain useful information about future disruptions to input costs.