Question

Match each term with the correct definition economics, opportunity cost, marginal analysis, utility. a. The next-best thing that must be forgone in order to produce one more unit of a given product. b. The pleasure, happiness, or satisfaction obtained from consuming a good or service. c. The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity. d. Making choices based on comparing marginal benefits with marginal costs.

Short answer

a = opportunity cost; b = utility; c = economics; d = marginal analysis.

Step-by-step solution

Identify Key Term Definitions

To start, we need to clearly define each of the terms: economics, opportunity cost, marginal analysis, and utility. - **Economics** is the study of how individuals and societies use limited resources. - **Opportunity cost** refers to the value of the next best alternative that must be forgone when making a decision. - **Marginal analysis** involves comparing the additional benefits and costs of an activity. - **Utility** is the satisfaction or benefit derived from consuming a product or service.

Match Terms to Definitions

Now, we'll match the key terms to the provided definitions (a, b, c, d): - For (a): "The next-best thing that must be forgone..." matches **opportunity cost**. - For (b): "The pleasure, happiness, or satisfaction..." matches **utility**. - For (c): "The social science concerned with how individuals..." matches **economics**. - For (d): "Making choices based on comparing marginal benefits..." matches **marginal analysis**.

Key concepts

Opportunity Cost

When making decisions, opportunity cost is a crucial concept in economics. It refers to the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. To put it simply, it's what you have to give up to get something else.
For example, if a company decides to produce smartphones instead of laptops, the opportunity cost is the profit it could have earned from the laptops. Considering opportunity costs ensures that resources are used efficiently, and the benefits of the chosen option outweigh what is sacrificed. This concept helps individuals and businesses make informed decisions when resources, such as time or money, are limited. Understanding opportunity costs can guide better decisions by highlighting the real cost associated with every choice.

Marginal Analysis

Marginal analysis is a technique used in economics to analyze the additional or 'marginal' costs and benefits arising from a decision. This approach helps determine the impact of small changes within a given situation.
For instance, if increasing production by one unit leads to a cost of $1 but generates revenue of $2, then marginal analysis shows a net gain of $1 for that additional unit. This principle fundamentally guides businesses and individuals when optimizing resource use.

• Marginal Benefit: The additional satisfaction or utility one receives from consuming an extra unit of a good or service.
• Marginal Cost: The cost incurred from the production of one more unit of a good or service.

When marginal benefits exceed marginal costs, it suggests that the additional investment is worthwhile. Understanding this concept helps in making decisions that maximize benefits at the lowest cost possible.

Utility

Utility in economics refers to the level of satisfaction or pleasure that consumers derive from consuming a good or service. It is a subjective measure because different individuals derive different amounts of satisfaction from the same product.
For example, a chocolate bar may provide a large amount of utility or satisfaction to someone who loves chocolate compared to someone who prefers salty snacks. Utility serves as a guide for consumers in determining their preferences and choices.

• Total Utility: The total satisfaction received from consuming a certain quantity of a product.
• Marginal Utility: The added satisfaction gained from consuming one more unit of the product.

Understanding utility helps in predicting consumer behavior and understanding demand. Businesses use this concept to understand what drives consumer preference and purchases, tailoring their offerings accordingly to maximize both satisfaction and sales.