Unit 3 - Scarcity, work and choice, key terms

Question 1

Constrained choice problem

Answer 1

This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce

Question 2

Scarcity

Answer 2

A good that is valued, and for which there is an opportunity cost of acquiring more

Question 3

Opportunity cost

Answer 3

When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative

Question 4

Marginal product

Answer 4

The additional amount of output that is produced of a particual input was increased by one unit, while holding all other inputs constant

Question 5

Indifference curve

Answer 5

A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual

Question 6

Marginal rate of substitution (MRS)

Answer 6

The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve

Question 6

Marginal rate of transformation (MRT)

Answer 6

The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier

Question 7

Feasible set

Answer 7

All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces

Question 8

Budget contraint

Answer 8

An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources

Question 9

Income effect

Answer 9

The effect that the additional income would have if there were no change in the price or opportunity cost

Question 10

Substitution effect

Answer 10

The effect that is only due to changes in the price or opportunity cost, given the new level of utility