Basic Economics Concepts

allocative efficiency

Producing the mix of goods and services most desired by society, where marginal benefit = marginal cost.

cost-benefit analysis

Weighing the expected costs of an action against its expected benefits to decide if it’s worthwhile.

efficient

Using resources in a way that maximizes output and leaves no possible gains without sacrificing something else.

inefficient

Using resources in a way that fails to maximize output (wasteful or producing inside the PPF).

law of increasing opportunity costs

As production of one good increases, the opportunity cost of producing additional units rises, because resources are not equally well-suited for all uses.

marginal

Refers to the additional or extra effect of producing or consuming one more unit of something.

marginal analysis

Decision-making that compares marginal benefits (MB) to marginal costs (MC).

net benefits

The difference between total benefits and total costs of an action.

normative economics

Economic statements that reflect opinions or value judgments (“what should be”).

opportunity cost

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

positive economics

Economic statements that are factual and testable (“what is”).

production possibilities frontier (PPF)

A curve showing the maximum combinations of two goods an economy can produce given fixed resources and technology.

productive efficiency

Producing on the PPF, using all resources fully and effectively (no waste).

rational

Acting in a way that seeks to maximize self-interest by weighing costs and benefits.

self-interest

The pursuit of personal benefit, which in markets helps guide resource allocation (ties to the invisible hand).

sunk cost

A past cost that cannot be recovered and should not influence current decisions.

unattainable

Points outside the PPF

combinations of goods and services that cannot be produced with available resources/technology.