Principles of Macroeconomics 3e - Chapter 2: Choice in a World of Scarcity

These flashcards cover the key concepts from Chapter 2 of the Principles of Macroeconomics, focusing on choices and scarcity in economic decision-making.

Budget Constraint

All possible consumption combinations of goods that someone can afford when all income is spent.

Opportunity Set

All possible combinations of consumption that an individual can afford given the prices of goods and their income.

Opportunity Cost

What people must give up to obtain what they desire; the value of the next best alternative.

Marginal Analysis

Examining the benefits and costs of choosing a little more or a little less of a good.

Law of Diminishing Marginal Utility

As a person receives more of a good, the additional utility from each additional unit of the good declines.

Sunk Costs

Costs that were incurred in the past and cannot be recovered; decisions should be based on future outcomes.

Production Possibilities Frontier (PPF)

A diagram showing the productively efficient combinations of two products that an economy can produce given its resources.

Productive Efficiency

When it is impossible to produce more of one good without decreasing the quantity of another good.

Allocative Efficiency

When the mix of goods produced represents the mix that society most desires.

Comparative Advantage

When a country can produce a good at a lower opportunity cost than another country.