Key Terms

Key Terms

allocative efficiency
when the mix of goods being produced represents the mix that society most desires
budget constraint
all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity 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 of production
invisible hand
idea that self-interested behavior by individuals can lead to positive social outcomes
law of diminishing marginal utility
as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units
law of diminishing returns
as additional increments of resources are added to producing a good or 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
statement which describes how the world should be
opportunity cost
measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative
opportunity set
all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income
positive statement
statement which describes the world as it is
production possibilities frontier (PPF)
diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available
productive efficiency
when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)
sunk costs
costs that are made in the past and cannot be recovered
satisfaction, usefulness, or value one obtains from consuming goods and services