Chapter 2 - Intro to Choice in a World of Scarcity

What is opportunity cost?

The highest valued alternative that must be sacrificed as a result of choosing.

What is utility in economics?

The intrinsic property of anything that leads to choosing it over an alternative; the subjective benefit or satisfaction expected from a course of action.

What is a budget constraint?

A representation of the combinations of goods and services that a consumer can purchase given their income and the prices of those goods.

What are sunk costs?

Costs incurred in the past that cannot be recovered.

Give an example of a sunk cost.

Paying $20 to see a movie and leaving after 30 minutes because you dislike it.

What is productive efficiency?

A situation where it is impossible to make more of one good without making less of another good, given available inputs and technology.

What is allocative efficiency?

The economy is producing the combination of goods and services that society desires.

What does the Production Possibilities Frontier (PPF) illustrate?

The maximum feasible amounts of two goods that a country can produce with available resources and technology.

What happens when a country operates inside the PPF?

It indicates that resources are not being used efficiently.

How does international trade relate to the PPF?

Trade allows countries to reach production points beyond their individual PPFs.

What is the significance of diminishing marginal utility?

As consumption of a good increases, the additional satisfaction gained from consuming each additional unit decreases.

The Budget Constraint Equation

B=P1Q1+P2Q2

• B - budget

• Q - quantity

• P - price

The Budget Constraint Equation (y=mx+b)

Q1=-P2/P1(Q2)+B/P1