Principles of Macroeconomics Chapter 2: Choice in a World of Scarcity

These flashcards cover key terms and concepts from Chapter 2 of Principles of Macroeconomics, which discusses choices made under scarcity.

Budget constraint

All possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent.

Opportunity set

All possible combinations of consumption that someone can afford given the prices of goods and their income.

Opportunity cost

What people must give up to obtain what they desire; the value of the next best alternative.

Marginal analysis

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

Utility

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

Law of diminishing marginal utility

As a person receives more of a good, the additional satisfaction from each additional unit declines.

Sunk costs

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

Production possibilities frontier (PPF)

A diagram that shows the productively efficient combinations of two products that an economy can produce with its resources.

Productive efficiency

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

Comparative advantage

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

Invisible hand

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

Tradeoff

The compromise that occurs when one resource is used for one purpose instead of another.

Diminishing returns

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

Allocative efficiency

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

Self-interest

The economic notion that individuals act primarily in their own interest.

Positive statements

Descriptive statements that explain how the world is; factual.

Normative statements

Subjective statements that describe how the world should be; based on opinions.