Principles of Macroeconomics 3e – Chapter 2: Choice in a World of Scarcity

Vocabulary flashcards covering key terms from Chapter 2: Budget Constraint, PPF, and objections to the economic approach.

Budget constraint

The set of all consumption bundles a consumer can afford given current prices and income; the boundary of the opportunity set.

Opportunity set

All bundles of goods that can be purchased with the given budget; points on or inside the budget constraint.

Consumption combination

A specific mix of goods chosen from the budget constraint (e.g., burgers and bus tickets).

Opportunity cost

The value of the next best alternative forgone when making a choice.

Budget

The amount of money available to spend on goods and services.

Utility

Satisfaction or usefulness derived from consuming goods and services.

Marginal utility

The additional utility gained from consuming one more unit of a good.

Marginal analysis

Evaluating the benefits and costs of consuming a little more or a little less of a good.

Production Possibilities Frontier (PPF)

A diagram showing the productively efficient combinations of two goods an economy can produce with available resources.

Productive efficiency

When it is impossible to increase output of one good without decreasing the output of another.

Allocative efficiency

When the mix of goods produced reflects society’s preferences.

Comparative advantage

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

Law of diminishing returns

As more resources are added to producing a good, the incremental gain from those resources eventually declines.

Law of diminishing marginal utility

The additional utility from each extra unit of a good decreases as more units are consumed.

Invisible hand

Self-interested individual actions can lead to positive social outcomes.

Positive statements

Statements that describe the world as it is; objective and testable.

Normative statements

Statements that describe how the world should be; subjective judgments about what ought to be.

Scarcity

The condition of having limited resources relative to unlimited wants.

Choice

The act of selecting among alternatives given scarcity.