definitions

all books

opportunity cost

the cost of using resources for a certain activity, measured in terms of the net benefit that could be derived from the next best alternative forgone

marginalist principle answering scheme

The marginalist principle involves weighing marginal costs and benefits.

[context firm/consumer] needs to weigh the marginal benefit of [context benefit] against the marginal cost of [context cost]

MB is from context

MC is from context

MB > MC – consumers buy more

When MB>MC, it is rational to purchase 1 more unit of [context] as this will increase total utility by a larger extent than increase in total cost. This will increase net total utility.

MB < MC – consumers will buy less

On the other hand, it is rational to buy less of [context] if MB < MC, since reducing the purchase will lower total utility by less than total cost, thus increasing net total utility.

Since rational consumers aim to maximise net total utility, the optimal is purchasing until MB = MC, where net total utility is maximised and can no longer be further increased

unintended consequences

may occur because economic agents may not have made their decisions under perfect information

Production Possibilities Curve (PPC)

shows the combinations of the maximum amount of two goods that an economy can produce within a certain period, usually a year, with a fixed level of technology and when all available resources are fully and efficiently employed

effective demand

when consumers are both willing and able to pay for the goods and services required.

effective supply

willingness and ability of a firm to offer a good for sale at various prices in a given time period.

YED

measures the responsiveness of demand to a change in income, ceteris paribus

XED

measures the responsiveness of demand for one good to a change in the price of another good, ceteris paribus.