Chapter 2 Vocab Flashcards
Allocative Efficiency
When the mix if goods produced represents the mix society desires
Budget constraint
All possible consumption combinations of goods someone can afford, given the prices of goods (when all income is spent, the boundary of opportunity is set)
Comparative advantage
When a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost if production
Invisible hand
Adam Smith’s concept that an individuals’ self-interested behavior can lead to positive social outcomes
Law of diminishing marginal utility
As we consume more of a good/service, the utility we get from additional units of that good/service tends to become smaller from what we received from earlier units
Law of diminishing returns
As we add additional increments of resources to producing a good/service, the marginal benefit from those additional increments will decline
Marginal analysis
Examination of decisions on the margin, meaning a little more or a little less from the status quo
Normative statement
How the world should be
Opportunity cost
Measures the cost by what we give up/forfeit in exchange; measures the value of forgone alternative
Positive statement
How the world is
PPF: Production Possibilities Frontier
A diagram that shows the productively efficient combination of two products the economy can produce given its resources
Productive efficiency
When it is impossible to produce more of one good/service without decreasing the quantity of another good/service
Sunk costs
Costs that we make in the past that we cannot recover
Utility
Satisfaction, usefulness, or value one obtains from consuming goods/services
Opportunity set
all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
