1. The core principles of economics

Question 1

Economic approach

Answer 1

• is the study of people ‘in the ordinary business of life’
• helps you make better decisions

Question 2

Microeconomics

Answer 2

the study of individual decisions making and the impacts for specific markets

Question 3

Macroeconomics

Answer 3

the study of decision-making across the whole economy

Question 4

4 core principles for analyzing decisions

Answer 4

• cost-benefit
• opportunity cost
• marginal
• interdependence

Question 5

The cost-benefit principles

Answer 5

• evaluate the full set of costs and benefits
• pursue the choices whose benefits are at least as large as their costs

Question 6

Money as a measure

Answer 6

• allows you to compare costs and benefits
• take account of a wide variety of nonfinancial gains, satisfaction and time

Question 7

economic surplus

Answer 7

total benefits - total cost

Question 8

maximizing economic surplus

Answer 8

• follow the cost-benefit principle to yield higher benefits
• by maximizing economic surplus, you make good decisions

Question 9

framing

Answer 9

refers to how different alternatives are described or framed

Question 10

framing effects

Answer 10

can lead you astray and can make identical choices seem different

Question 11

opportunity cost

Answer 11

the true cost of something is the next best alternative you must give up to get it

Question 12

scarcity

Answer 12

• occurs because resources are limited
• therefore, all choices require a trade-off

Question 13

4 lessons about opportunity costs

Answer 13

• some are out-of-pocket costs
• don’t need to involve out-of-pocket financial costs
• not all out-of-pocket costs are real opportunity costs
• some nonfinancial costs are not opportunity costs

Question 14

applying the opportunity cost principle

Answer 14

• ask ‘‘or what”
• consider the alternatives

Question 15

sunk cost

Answer 15

• cost incurred and cannot be reversed
• not an opportunity cost
• good decisions ignore sunk costs

Question 16

PPFs

Answer 16

• illustrates the trade-offs when deciding how to allocate scarce resources
• illustrates the different sets of output that are attainable with scarce resources

Question 17

move along the PPF

Answer 17

• producing more of one good means producing less of another

Question 18

marginal principle

Answer 18

• helps to maximize economic surplus
• break down decisions into smaller ones
• weigh marginal benefits and marginal costs

Question 19

marginal benefit

Answer 19

the extra benefit from one unit

Question 20

marginal cost

Answer 20

the extra cost from one extra unit

Question 21

when is the marginal principle useful

Answer 21

marginal principle: how many decisions not either/or
cost benefit: either/or
(apply marginal, then cost-benefit)

Question 22

rational rule

Answer 22

• if something is worth doing, keep doing it until your MB=MC
• leads to good decisions
• maximizing economic surplus

Question 23

interdependence principle

Answer 23

the best choices depend on other choices you make, others make, developments and expectations

Question 24

4 types of interdependencies

Answer 24

• individual choices
• people/businesses in the same market
• between markets
• through time

Question 25

using core principles in practice

Answer 25

1. marginal
2. cost benefit
3. opportunity cost
4. interdepence