Economist's Toolkit
This is a simplification of reality used to understand the relationship between variables.
Model
Define Opportunity Cost
The value of the next best alternative given up when making a decision
This is the decision about how much more or less to do.
What is marginal analysis?
What does PPC show?
The maximum possible output for an economy
Something accepted as being true in a model.
What is an assumption
What are the three steps in the model-building process?
Identify the problem, develop a model, test the model
Define trade-off
All options given up when a decision is made
The extra gain from an additional unit is called what?
What is marginal benefit
What do we call producing the maximum output with given resources?
What is efficiency
Explain scarcity in terms of the PPC
Scarcity forces choices between points on the PPC; producing more of one good means producing less of another
Which type of economics is based on value judgments like “should” or “ought to”?
What is normative economics?
What is the difference between a trade-off and an opportunity cost?
Trade-off = all options given up; Opportunity cost = the single next best option
The extra cost from an additional unit is called what?
What is marginal cost
What do we call producing less than the maximum possible output?
What is inefficiency or underutilization
Using 12 boards to make shelves and signs, when would a point be considered inefficient?
When not all 12 boards are used
Which type of economics uses facts and testable statements?
What is positive economics?
Example — Choosing to study economics instead of going out with friends. What is the opportunity cost?
The time spent with friends
Comparing additional rewards and costs to see if benefits outweigh costs is called what?
What is cost-benefit analysis
What causes the PPC to shift outward?
Growth in resources or technology
When is a point impossible on the PPC?
When it requires more resources than are available
In graphs, a relationship where both variables move in the same direction is called what?
What is a direct relationship
The law of increasing opportunity cost states what?
As production of one good increases, more and more of the other must be given up
Net benefit is defined as what?
Marginal benefit minus marginl cost
Why are all points along the PPC considered efficient?
Because all resources, time, and technology are fully used
Technology, resources, and output capacity all determine this economic curve.
What is the production possibilities curve