Unit 2: Choice and Trade-off

Vocabulary flashcards covering budget constraint, PPF, efficiency, growth, and trade concepts from Unit 2: Choice and Trade-off.

Budget constraint

All possible consumption combinations of goods that a consumer can afford given current prices and income; boundary of the opportunity set.

Opportunity set

All combinations of goods a consumer can afford given prices and income; may not exhaust all income.

Opportunity cost

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

Slope of the budget constraint

The rate at which the consumer can trade one good for another; equal to the relative price of the two goods.

Production Possibilities Frontier (PPF)

A diagram showing the productively efficient combinations of two goods an economy can produce with its available resources; illustrates trade-offs.

Inside the PPF

Points inside the PPF are feasible but productively inefficient because more of at least one good could be produced without sacrificing the other.

On the PPF

Points on the PPF are productively efficient; resources are fully utilized.

Outside the PPF

Points outside are infeasible given current resources.

Productive efficiency

When it is impossible to produce more of one good without reducing the output of another; achieved on the PPF.

Allocative efficiency

When the mix of goods produced reflects society's preferences; the most desired combination.

Law of diminishing returns

As more resources are added to production of a good, the additional output gained from each extra unit eventually declines.

Marginal decision-making

Analyzing the benefits and costs of small changes in quantity of a good.

Utility

Satisfaction or usefulness obtained from consuming goods and services.

Marginal utility

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

Law of diminishing marginal utility

The additional satisfaction from each extra unit declines as consumption increases.

Economic growth

An increase in a country’s productive capacity due to more resources or better technology.

Comparative advantage

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

Absolute advantage

When a country can produce more of a good with the same resources or using fewer resources than another country.

Gains from trade

A country can consume more than it could produce alone by specializing and trading based on comparative advantage.

Sunk costs

Costs incurred in the past that cannot be recovered; should be ignored in future decisions.

Factors of production

Inputs used to produce goods and services (land, labor, capital, entrepreneurship).

Technological progress

Improvements in technology that enable more output with the same inputs.

Outward shift of the PPF

A rightward shift of the PPF reflecting economic growth from more resources or better technology.

Slope of the PPF

The opportunity cost of producing one more unit of a good, in terms of the other good.