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2.5: Key Terms

  • Page ID
    215578
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    allocative efficiency
    when the mix of goods 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
    Adam Smith's concept that individuals' self-interested behavior 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 tends to become smaller than what we received from earlier units
    law of diminishing returns
    as we add additional increments of resources 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 we give up/forfeit 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)
    a 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 we make in the past that we cannot recover
    utility
    satisfaction, usefulness, or value one obtains from consuming goods and services

    This page titled 2.5: Key Terms is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by OpenStax.

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