Choice in a World of Scarcity

allocative efficiency

when mix of goods 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 - is the boundary of the opportunity cost of production

Comparative advantage

When a country can produce a food at a lower cost in terms of other goods or when a country has a lower opportunity cost of production

invisible hand

Adam Smith’s concept that individuals’ self0interested behavior can lead to positive social outcomes

Law of diminishing marginal utility

as we consume more of a good/service, the utility we get from an additional unit of the good/service tends to become smaller than what was received from earlier units

law of diminishing returns

as additional increments of resources to producing a good/service, the marginal benefit from those additional increments will decline

marginal analysis

examination of decisions on the margin - a little more or little less from the status quo

normative statement

statement which describes how the world should be

opportunity cost

measure cost by what we give up in exchange; measures the value of the forgone alternative

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods + an individual’s income

positive statement

statement which describes the world as it is

Production Possibilities Frontier

diagram that shows the productively efficient combinations of two products that an economy can produce given the resources that are available

productive efficiency

when it is impossible to produce more of one good without decreasing the quantity produced of nother good

sunk costs

costs that we make in the past we cannot recover

utility

satisfaction, usefulness, or value one obtains from consuming goods / services