Chapter 2: Choice in a World of Scarcity – Key Terms (VOCABULARY)

Vocabulary flashcards covering core terms from Chapter 2: scarcity, budget constraints, PPF, efficiency, and basic economic reasoning.

Budget constraint

All affordable combinations of two goods given income and prices.

Budget constraint equation

Px x + Py y = I; the linear equation that shows the tradeoff between two goods.

Opportunity cost

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

Slope of the budget constraint

The rate at which one good can be traded for another; magnitude equals Px/Py with a negative slope on the standard graph.

Marginal analysis

Weighing incremental benefits and costs to guide decisions.

Law of diminishing marginal utility

As more units of a good are consumed, each additional unit provides less extra satisfaction.

Sunk costs

Past costs that cannot be recovered and should be ignored in current decisions.

Production Possibilities Frontier (PPF)

Curve showing the maximum feasible output combinations given resources and technology.

Productive efficiency

Producing on the PPF; no way to increase one good without decreasing another.

Allocative efficiency

Producing the mix of goods most desired by society.

Law of increasing opportunity costs

PPF is concave because opportunity costs rise as resources are shifted; implies a bowed-out curve.

Comparative advantage

The ability to produce a good at a lower opportunity cost than others.

Trade and specialization (comparative advantage)

Countries specialize according to comparative advantage and trade to raise total production and mutual welfare.

Opportunity set

All affordable combinations of consumption across goods.

Positive statement

A statement describing how the world is—factual and testable.

Normative statement

A statement expressing how the world should be—an opinion or value judgment.

Invisible hand

The idea that self-interest in markets can lead to socially beneficial outcomes.

Self-interest

A simplifying assumption in economics; does not exclude altruism or moral behavior.

Economic freedom

Freedom to make personal choices reflecting values and priorities; supports diverse preferences.

Utility

Satisfaction or value gained from consuming goods or services.