ECNS 201 - Unit 1

allocative efficiency

when the mix of goods being 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; the boundary of the opportunity.

comparative advantage

when a country can produce a good at a lower cost in term of other goods, or, when a country has a lower opportunity cost of production.

invisible hand

idea that self-interested behavior by individuals can lead to positive social outcomes.

law of diminishing marginal utility

as we consume good of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units.

law of diminishing returns

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

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo.

normative statement

statement which describes how the world should be.

opportunity cost

measures cost by what is given up in exchange; measures the value of the forgone alternative.

opportunity set

all possible combination of a consumption that someone can afford given the prices of goods and the individual’s income.

positive statement

statement which describes the world as it is.

production possibilities frontier (PPF)

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

production possibilities frontier (PPF) slope

gives the opportunity cost of producing one more unit of the good in the x-axis in terms of the other good (in the y-axis).

• how much of the y-axis second good must be given up to produce an additional unit of the x-axis first good.

productive efficiency

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

sunk costs

costs that are made in the past and cannot be recovered.

utility

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

absolute advantage

when one country can use fewer resource to produce a good compared to another country. meaning when a county is more productive compared to another.

gain from trade

a country that can consume more than it can produce as a result of a specialization and trade.

specialization

processing more of one good in which a country has a comparative advantage. leads to an increase in total world production. allows countries to focus on their strengths, improving efficiency and output.

marginal analysis

examination of the associated costs and potential benefits of specific business activities or financial decisions. does the increase in income from the change outweigh the increase in cost to make the change. observed as the cost of producing an individual unit rather than output as a whole.