02 Thinking Like an Economist Flashcards
Scarcity (no-free-lunch) Principle
We have unbounded wants and needs, but limited resources. Having more of any good thing necessarily requires having less of something else.
Cost-Benefit Principle
An action should be taken but ONLY if its benefits are at least as great as the extra costs. (seen as a simple but useful model of how people should make choices, used by rational people)
Incentive Principle
If costs of an action increase, action is less likely. If benefits of an action increase, action is more likely (used to predict people’s behaviour)
Economic Surplus
The economic surplus of an action is equal to its total benefit minus its total costs
Opportunity cost
Value of what must be forgone in order to undertake an activity. Only considers your best alternative, NOT the combined value of all possible activities. Includes implicit and explicit costs.
Decision Pitfall 1
Measuring costs and benefits as proportions instead of absolute amounts
Decision Pitfall 2
Ignoring implicit costs (doing an activity makes you give up some other great activity?)
Decision Pitfall 3
Failure to think at the margin (sunk costs cannot be recovered)
Marginal cost
The increase in total cost from one additional unit of an activity
Average cost
Is total cost divided by the number of units
Marginal benefit
The increase in total benefit from one additional unit of an activity
Sunk cost
A cost that has already been incurred and cannot be recovered, when you make your next decision. (e.g. do not overeat at a buffet, your entrance fee is a sunk cost).
Economics
How people make choices in the face of scarcity and the implications of those choices for society as a whole.
Microeconomics
Studies choice and its implications for price and quantity in individual markets
Macroeconomics
Studies the performance of national economies and the policies that governments use to try to improve that performance
