Key Terms
Example
A basic gym membership costs $30/month; full membership costs $40/month. The marginal cost of upgrading is $10.
Equation
1500 = 3(Q1) + 75(Q2)
Solving for gallons of gas
Q1 = 500 - 25(Q2)
Budget constraint
Only one scarce resource (money). Every dollar has the same purchasing power regardless of what you buy.
PPF
Multiple scarce resources (labor, land, capital, etc.). Different resources are not equally good at producing different
Concrete example
A society has only doctors and teachers.
Productive Efficiency
On the PPF; impossible to produce more of one good without reducing another.
Allocative Efficiency
On the PPF at the point that matches what society actually wants.
Marginal Cost
The change in total cost from one option to the next.
Formula
Marginal Cost = Change in Total Cost
Marginal Benefit
The change in benefit (satisfaction or revenue) from one option to the next.
RATIONAL DECISION RULE
Choose the option where marginal benefit is greater than or equal to marginal cost.
Positive
Fact-based, testable, describes what IS. Example: "Eleven states spent more on corrections than higher education in 2013
Normative
Value-based, describes what SHOULD BE. Example: "This is not sound policy." Depends on values.
Scarcity
Limited resources relative to unlimited wants; forces trade- offs.