Chapter 2: Choice in a World of Scarcity

Flashcards covering key concepts from Chapter 2, including budget constraints, opportunity cost, PPF, and comparative advantage.

What is a 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.

What is an opportunity set?

All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income (all income does not need to be spent).

What does opportunity cost indicate?

What one must give up to obtain what he or she desires; the value of the next best alternative.

What is marginal analysis?

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

Define utility in economics.

Satisfaction, usefulness, or value one obtains from consuming goods and services.

What is the law of diminishing marginal utility?

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

What are sunk costs?

Costs that were incurred in the past and cannot be recovered.

What is a 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.

What is the 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.

What is productive efficiency?

When it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service).

What is allocative efficiency?

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

What is comparative advantage?

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

What are positive statements in economics?

Statements that describe the world as it is; these are factual.

What are normative statements in economics?

Statements that describe how the world should be; these statements are subjective questions of opinion.

What is the invisible hand concept?

The concept that individuals' self-interested behavior can lead to positive social outcomes.