Econ 1b, Foldvary

Exchange and trade;

Definitions

"Utility" is the importance we place on goods, or the satisfaction or usefulness we get from goods.

Marginal utility is the utility obtained from one more unit.

A "gain from trade" is the increase in marginal utility that takes place when parties exchange goods.

The principle of diminishing marginal utility:

after some quantity, marginal utility diminishes.

Comparative advantage - a lower opportunity cost.

Free trade is the exchange of goods without any trade barriers such as quotas and tariffs.