Economics Concepts I

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Allocative efficiency

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When the mix of goods produced represents the mix that society most desires.

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Budget Constraint

Back

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.

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Comparative Advantage

Back

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.

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Invisible Hand

Back

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes.

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Law of Diminishing Marginal Utility

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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.

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Law of Diminishing Returns

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As we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline.

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marginal analysis

Back

examination of decisions on the margin, meaning a little more or a little less from the status quo

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Normative Statement

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A statement that describes how the world should be.

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Opportunity Cost

Back

Measures cost by what we give up or forfeit in exchange; opportunity cost measures the value of the forgone alternative.

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Opportunity Set

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All possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.