Scarcity, Choice, and Opportunity Cost

What is a budget constraint?

A model showing all combinations of goods/services someone can afford based on income and prices.

What is an opportunity cost?

The value of the next best alternative you give up when making a choice.

What does the slope of the budget constraint represent?

The opportunity cost of one good in terms of the other.

Why is marginal utility important?

It explains why we stop consuming when benefit drops below cost.

What does the law of diminishing marginal utility state?

As a person consumes more of a good, each extra unit gives less added satisfaction.

What is a sunk cost?

A past expense that cannot be recovered and should not affect current choices.

What is marginal analysis?

Comparing additional benefits and costs of one more unit of something.

Why do rational people not make all-or-nothing decisions?

Because marginal utility decreases and trade-offs are involved.

Economics assumes people are selfish. Shouldn’t we encourage people to care about others?

Economics is descriptive, not moralistic.
It explains what people do—not what they should do.

Self-Interest Isn’t Always Bad

People seeking their own gain can unintentionally help society.

• When businesses compete, they offer better products.

• When people look for good deals, they reward efficiency.