Week one Intro to Environmental Economics

Budget constraint

All possible consumption combinations of goods that someone can afford, given the price of goods, when all income is spent, the boundary of the opportunity set.

equation: P1(Q1)+ P2(Q2) = budget for 2 items

Opportunity cost

Measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative.

Example: if you sleep through a lecture, the opportunity cost is what you could have learned and understood if you went to the lecture.

Marginal analysis

Is the examining the benefits and costs of choosing a little more or a little less of a good

Utility

Positive outcome from choosing a good or service

Law of diminishing marginal utility

A person receives more of a good, the additional (or marginal) utility from each additional unit if good declines.

For example: first slice of pizza brings more satisfaction than the sixth

Sunk costs

Are costs that were incurred in the past and cannot be recovered, should not affect the current decision

Production possibilities frontier (PPF)

A diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

Law of increasing opportunity cost

As production of a good or service increases, the marginal opportunity cost of producing it increases as well.

Productive efficiency

It’s impossible to produce more if one good (or service) with out decreasing the quantity produced of another good or service

Allocative efficiency

The mix of good produced represents the mix that society most desires

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

Positive statements

Describe the world as it is

Normative statements

How the world should be

Invisible hand

Possibility that broader social good can emerge from selfish individual actions

Law of diminishing returns

As additional increments of resources to producing a good or service are added, the marginal benefit from those additional increments will decline

Exchange/Trade

When a comparative advantage is recognized, entities may trade/exchange goods

Specialization

When an entity trades and focuses on producing a good they have comparative advantage in.