Ch. 1 Flashcards
cost-benefit principle
The incentives that shape decisions. Evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are as large as their costs.
economic surplus
Total benefits - total costs
framing effect
When a decision is affected by how a choice is described
interdependence principle
your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future.
marginal benefit
The extra benefit from one extra unit
marginal cost
The extra cost from one extra unit
production possibility frontier
Shows the different sets of output that are attainable with your scarce resources
marginal principle
Decisions about quantities are best made incrementally. You should break “how many” questions into a series into a series of marginal questions, weighing marginal benefits and marginal costs.
opportunity cost
The true cost of something is the next best alternative you have to give up to get it
Rational rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs
scarcity
The problem that resources are limited
sunk costs
A cost that has been incurred and cannot be reversed. It is not an opportunity cost, so ignore when making decisions.
someone else’s shoes technique
By mentally trading places with someone so you understand their objectives and constraints, you can forecast the decisions you will make.
willingness to pay
In order to convert nonfinancial costs or benefits into their monetary equivalents, ask yourself, “what is the most I am willing to pay for this benefit?”
