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Fundamentals of Economics

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absolute advantage
one party's ability to produce more of a good than another; compares direct cost of production
comparative advantage
one party's ability to produce a good at a lower opportunity cost than another; results in gains from trade and makes specialization efficient
cost-benefit analysis
how rational decision-makers decide on one choice by weighing the pros and cons of a decision in an attempt to maximize utility
study of how individuals allocate resources to satisfy unlimited wants;
the last good produced or taken, as in marginal utility and marginal cost
marginal utility
the amount of satisfaction one derives from consuming one more of a good or service
normative economics
economic analysis that focuses on what should be, rather than what actually is or can be; subjective
opportunity cost
the cost of what is given up when you make a decision; the cost (monetary or otherwise) of the "next best" alternative
Pareto efficient
a state where it is impossible to improve one person's well-being without reducing someone else's well-being
positive economics
economic analysis that seeks to describe and explain economic phenomena; does not involve value judgements; objective
production possibilities frontier (PPF)
diagram of the different combinations of output that can be produced; all points on the PPF are efficient; all points within the PPF are inefficient; all points outside the PPF cannot be attained; represents the trade-offs a producer faces and all possible combinations of output in an economy
finite nature of resources; fundamental assumption of economics; requires actors to allocate scarce resources to fulfill unlimited wants
the need to give up some good to obtain another good; decisions about which are represented on the Production Possibilities Frontier
unlimited wants
assumption that all people have unbounded desires that can never be fully fulfilled; clashes with the scarce nature of resources; requires people to make judgement about utility and trade-offs
amount of satisfaction one derives from something; usually expressed as a number