CHAPTER 2 BOOK

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.

Opportunity Cost

Measures cost by what we give up/forfeit in exchange; measures the value of the forgone alternative.

Marginal Analysis

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

Law of Diminishing Marginal Utility

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

Sunk Costs

Costs that were incurred in the past and cannot be recovered; should not affect current decision-making.

Productive Efficiency

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

Allocative Efficiency

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

Comparative Advantage

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

Law of Diminishing Returns

As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline.

Utility

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

Positive Statement

Statement which describes the world as it is.

Normative Statement

Statement which describes how the world should be.

Invisible Hand

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes.

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.