Sections
Key Terms
Key Terms
- allocative efficiency
- when the mix of goods being produced represents the mix that society most desires
- budget constraint
- all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
- comparative advantage
- when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production
- invisible hand
- idea that self-interested behavior by individuals can lead to positive social outcomes
- law of diminishing marginal utility
- as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units
- law of diminishing returns
- as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline
- marginal analysis
- examination of decisions on the margin, meaning a little more or a little less from the status quo
- normative statement
- statement which describes how the world should be
- opportunity cost
- measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative
- opportunity set
- all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
- positive statement
- statement which describes the world as it is
- production possibilities frontier (PPF)
- diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
- productive efficiency
- when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
- sunk costs
- costs that are made in the past and cannot be recovered
- utility
- satisfaction, usefulness, or value one obtains from consuming goods and services