Final Study Guide

Marginal Benefit

The gain or pleasure that comes from consuming an additional unit of a good or service.

Opportunity Cost

The highest valued alternative forgone when a choice is made.

Normative Statement

A statement that expresses a value judgment about whether a situation is desirable or undesirable.

Positive Statement

A statement that can be tested and validated; it describes what is.

Scarcity

The condition that arises because human wants exceed the resources available to satisfy them.

Economics

The study of how people make choices under conditions of scarcity.

Self-Interest

Choices that are made based on what is best for the individual.

Incentive

A reward or penalty that encourages or discourages an action.

Capital

Tools, instruments, machines, and buildings used by businesses to produce goods and services.

Circular Flow Model

An economic model that shows the flow of expenditures and incomes resulting from decisions made by consumers and firms.

Capital Goods

Goods used by businesses and governments to produce other goods and services.

Factors of Production

The productive resources used to produce goods and services: land, labor, capital, and entrepreneurship.

Producer Surplus

The difference between the price at which a good is sold and the marginal cost of producing it.

Consumer Surplus

The difference between what consumers are willing to pay for a good and what they actually pay.

Marginal Utility

The additional satisfaction or pleasure derived from consuming one more unit of a good.

Utility-Maximizing Rule

The rule stating that individuals maximize their total utility when the marginal utility per dollar spent is equal across all goods.

Indifference Curve

A graph showing different combinations of goods that give the same level of satisfaction to a consumer.

Diminishing Marginal Utility

The principle that as more of a good is consumed, the additional satisfaction derived from each additional unit decreases.

Law of Demand

The principle that other things being equal, an increase in price leads to a decrease in quantity demanded.

Equilibrium

The point in a market where quantity demanded equals quantity supplied.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in price.

Microeconomics

The branch of economics that examines the behavior of individuals and firms in making decisions regarding the allocation of resources.

Macroeconomics

The branch of economics that studies the economy as a whole and the interactions of various aggregates.

Production Possibilities Frontier (PPF)

A curve depicting all maximum output possibilities for two goods, given a set of inputs.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity more efficiently than another activity.

Market Price

The price at which a good or service is bought and sold in a market.