chapters 1-3

Trade-offs

what you give up for more of something else

opportunity cost

the value of next best alternative that is sacrificed to choose something else

Positive economics

• describes the state of the world or how it actually functions

• no value judgements

normative economics

determines how the world should behave

value judgments

ex should, would be good to

marginal analysis

comparing the additional costs of continuing an action to its additional benefits to determine if one should continue

Incentives

any reward for completing a service or fulfilling an agreement

Productivity

the ability to produce goods and services from a given set of resources

an inc in productivity is getting.more goods from the same amount of resources.

Inflation

general rise in the price of goods an services

Production possibilities frontier PPF

the maximum amount of various goods and services that can be produced given a set of resources and technology

Efficient

when it is not possible to inc the output of one good without giving up output of another good

Inefficient

when it is possible to inc the output of a good without giving up output of another good

Absolute advantage

• able to produce more output with the same set of inputs

• trade is good when a group specializes in something they have the abs adv in and trade it for another product

comparative advanage

• when one group has a lower opp cost than another group for the same product

• no group can have comp adv for every product

• comp adv can make trade beneficial even when one group has the abs adv in both products bc they can trade for the product that has a higher opp cost for them

PPF for countries( production possibilities frontier)

• usually a curve because the opp cost is not constant

• Some resources and workers are better suited for some products than others

Marginal benefit

the additional benefit as a result of an additional good or service

marginal cost

the additional cost as a result of an additional good or service

• if mb>mc, the action should be taken

Utility

the amount of satisfaction or pleasure one receives from consuming goods, services, or activities

Utility function

an individuals preferences over possible choices

marginal utility

the gain in utility from on additional good or service

Diminishing marginal utility

the tendency to get less marginal utility from each additional unit consumed

utility maximization

the assumption people make decisions with the goal of maximizing their utility

Budget constraints

the limit on the goods and services a consumer can purchase

Budget line

all the possible combos of purchases that exhaust a consumer’s budget

marginal utility per dollar mu/dollar

• mu/price of good

• When deciding what to purchase, always go for whatever has the highest mu/dollar

Sunk costs

past expenditures that are not ongoing and nonrefundable

sunk cost fallacy

continuing to do something unpleasant because of the amount of time/money that was already spent on it

lowest and highest price of trading phones in terms of tvs

The lowest and highest price must be between the two opportunity costs of the traders

because one would not be willing to trade phones for less than their opportunity cost of making a TV

The other would not be willing to give up more than their opportunity cost of a TV per phone