chapter 1 Flashcards
What is the first core principle of economics?
The ‘Cost-Benefit’ Principle: Do it when the benefits exceed the costs
What is the second core principle of economics?
The ‘Opportunity Cost’ Principle: The true cost of something includes what you must give up to get it
What is the third core principle of economics?
The ‘Marginal’ Principle: Break decisions down to: should I do one more, or one less?
What is the fourth core principle of economics?
The ‘Interdependence’ Principle: Your best choices depend on your other choices and the choices of others
What does the Cost-Benefit Principle suggest?
People choose to do things when the benefits exceed the costs
What is a common misconception about the Cost-Benefit Principle?
It is often misunderstood as selfish, but it accounts for the well-being of others as part of the costs and benefits
How are non-monetary costs and benefits evaluated?
By converting them into their monetary equivalent, asking ‘What is the most I am willing to pay for this?’
What is opportunity cost?
It is the next best alternative that must be given up to get something else
What is a sunk cost?
A cost that has already been incurred and cannot be reversed
What does the Marginal Principle advise?
Decisions are best made incrementally, assessing if the marginal benefit is greater than or equal to the marginal cost
What is economic surplus?
Economic surplus is the total benefits minus total costs flowing from a decision, representing how much a decision improves well-being.
What is a sunk cost?
A sunk cost is a cost that has already been incurred and cannot be reversed, and should not influence current decisions.
What does the Production Possibilities Frontier (PPF) show?
The PPF illustrates the trade-offs between different sets of output attainable with limited resources.
What happens when you move along the PPF?
Moving along the PPF reveals the opportunity cost of using scarce resources for one purpose over another.
What is the opportunity cost of allocating time inefficiently according to the PPF?
When time is allocated inefficiently, less than the maximum potential is achieved from scarce resources.
