1.3: The Economic Way of Thinking Flashcards
Six key ideas that define the economic way of thinking?
1) A choice is a tradeoff.
2) People make rational choices by comparing benefits and costs.
3) Benefit is what you gain from something.
4) Cost is what you must give up to get something.
5) Most choices are “how much” choices made at the margin.
6) Choices respond to incentives.
What is a tradeoff?
A tradeoff is an exchange—giving up one thing to get something else (eg. your choices)
What is a rational choice?
One that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.
Does economics view the choices that people make as rational?
Yes
What goods and services will be produced and in what quantities? (solve with rational choice)
those that people rationally choose to buy
What is the benefit of something?
The gain or pleasure that it brings and is determined by preferences—by what a person likes and dislikes and the intensity of those feelings.
How is benefit measured?
the most that a person is WILLING to give up to get something.
Define opportunity cost
The highest-valued alternative that must be given up to get that something
What is margin?
Margin = when a choice is made by comparing a little more of something with its cost, the choice is made at the margin
Marginal benefit is…
The benefit you receive when you increase an activity
Marginal cost is…
The opportunity cost you incur when you increase an activity
How do we make decisions?
You compare marginal benefit and marginal cost.
Self-interested actions are not necessarily selfish actions.
Explain self-interested actions
A self-interested act gets the most benefit for you based on your view about benefit.
The central idea of economics is that…
we can predict the self-interested choices that people make by looking at the incentives they face.
When do people reject options?
marginal cost exceeds the marginal benefit.
