Chapter 2 - Choice in a World of Scarcity

Question 1

Budget constraint

Answer 1

Straight line, individual

Question 2

Opportunity set

Answer 2

Shows all opportunity within a set budget

Question 3

Equation for budget constraint

Answer 3

Budget = P1 x Q1 + P2 x Q2

Question 4

2 types of opportunity costs

Answer 4

Price - money spent forgoes other possible purchases

Opportunity - opportunity taken forgoes other possible opportunities

Question 5

Marginal analysis

Answer 5

Comparing the benefits and costs of choosing a little more or a little less of a good

Question 6

Law of diminishing marginal utility

Answer 6

As we consume more of something, the utility we get from additional things tend to become smaller than what we received from earlier things

Question 7

Sunk cost

Answer 7

Costs incurred that cannot be recovered

Question 8

Production possibility frontier

Answer 8

Graph that shows productivity efficiency between two social resources. Has a slope. A growing economy will eventually push this outward.

Question 9

Law of diminishing return

Answer 9

(PPF graph) Giving up a lot of something to gain a little of something else

Question 10

Productive efficiency

Answer 10

Impossibility of increases one thing without decreasing another

Question 11

Allocative efficiency

Answer 11

Goods and services a society produces reflects their desires

Question 12

Comparative advantage

Answer 12

When a country can produce a good at a lower cost or when a country has a lower opportunity cost of production

Question 13

2 objections

Answer 13

1. People do not act like this in every day life

2. Firms and society should not act this way

Question 14

Positive statements

Answer 14

Facts, what is

Question 15

Normative statements

Answer 15

Opinions, what “should” be

Question 16

Invisible hand

Answer 16

Coined by Adam Smith. Meaning the market always eventually finds equilibrium as demand and supply change