Chapter 7 - Prices, resource allocation and margins

• What is the marginal principle?

  The idea that economic agents may take decisions by considering the effect of small changes from the existing situation
• What is rational decision making?

  A decision that allows an economic agent to maximise their objective, by setting the marginal benefit of an action equal to it's marginal cost
• What is utility

  The satisfaction received from consuming a good/service
• What is Marginal utility

  The additional utility gained from consuming an extra unit of a good or service
• What is the law of diminishing marginal utility?

  the more units of a good that are consumed, the lower the utility from consuming those additional units
• What's a price signal?

  Where the price of a good carries information to producers/consumers that guides the market towards equilibrium and assists in resource allocation
• When a firm operates at minimum cost, what efficiency is this?

  Productive efficiency
• When a firm allocates it's resources in such a way that a balance of goods and services that matches consumer preferences is achieved, what type of efficiency is this?

  Allocative efficiency