Fundamentals of Economic Analysis Flashcards
opportunity cost
the value of the sacrifice made to pursue a course of action (basically whatever else you could be doing)
marginal
the next unit or increment of an action
marginal benefit (MB)
the additional benefit received from the consumption of the next unit of a good or service
marginal cost (MC)
the additional cost incurred from the consumption of the next unit of a good or service
marginal analysis
making decisions based upon weighing the marginal benefits and costs of possible actions
production possibilities
different quantities of goods that an economy can produce with a given amount of scarce resources; graphically, the trade-0ff between the production of two goods is portrayed as a Production Possibility Curve/Frontier (PPF)
Law of Increasing Costs
the more of a good that is produced, the greater the opportunity cost of producing the next unit of that good
absolute advantage
exists if a producer can produce more of a good than all other producers
comparative advantage
a producer has this if he can produce a good at lower opportunity cost than all other producers
specialization
when firms focus their resources on production of goods for which they have comparative advantage, they are said to be specializing
productive efficiency
production of maximum output for a given level of technology and resources; all points on the PPF are productively efficient
allocative efficiency
production of the combination of goods and services that provides the most net benefit to society; the optimal quantity of a good is achieved when the MB = MC of the next unit; this only occurs at one point on the PPF
economic growth
occurs when an economy’s production possibilities increase; this can be a result of more resources, better resources, or improvements in technology
market economy (capitalism)
an economic system based upon the fundamentals of private property, freedom, self-interest, and prices
