allocative efficiency when the mix of goods being produced represents the mix that society most desires

assumption of rationality the assumption that people will make choices in their own self-interest, choosing things that provide the greatest personal benefit and foregoing those that aren’t as personally valuable and compelling; also called the theory of rational behavior

budget constraint all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent

comparative advantage the ability of a group or country to produce a good or service at a lower opportunity cost than another group or country

law of diminishing returns as additional increments of resources are devoted to a certain purpose, the marginal benefit from those additional increments will decline

marginal analysis comparing the costs and benefits of a little more or a little less

marginal benefit is the difference (or change) in what you receive from a different choice

marginal cost the difference (or change) in cost of a different choice

normative statements are subjective; they describe the world as it ought to be

opportunity cost is the value of the next best alternative

positive statements are objective; they describe the world as it is

production possibilities frontier (or curve) 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’s impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

sunk costs costs that are incurred in the past and can’t be recovered