Budget constraint
all possible consumption combinations of goods that someone can afford, when all income is spent
Opportunity set
all possible combinations of consumption that someone can afford given the price and the individuals income
Opportunity cost
indicates what one must give up to obtain what they desire
Marginal analysis
examining the benefits and costs of choosing a little more or a little less of a good
utility
satisfaction, usefulness, or value one obtains from consuming goods.
law of diminishing marginal utility
as a person receives more of a good, the additional utility from each additional unit of the good declines
sunk costs
costs that were incurred in the past and cannot be recovered
Sunk costs teaches us to
ignore past errors and make decisions based on what will happen in the future
Production possibilities frontier
a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.
Slope
shows the opportunity cost
Law of diminishing returns
as additional increments of resources to producing a good or services is added, the marginal benefit from those additional increments will decline
Productive efficiency
when it is impossible to produce more of one good without decreasing the quantity produced of another good service
Allocative efficiency
when the mix of goods produced represents the mix that society most desires
Comparative advantage
when a country can produce a good at a lower opportunity cost than another country
Invisible hand term
concept that individuals self interested behavior can lead to positive social outcomes