Chapter 1 Flashcards
If doing activity x means not being able to do activity y, then the value to your of doing y is a(an)______ of doing x.
opportunity cost
The study of broader aggregations of markets falls within the realm of
macroeconomics
The descriptor “Home Economicus” describes an individual motivated by
self-interest alone
Reservation Price
Price at which a person would be indifferent between doing x and no doing x
Costs that are beyond recovery at the moment a decision is made are known as ____ costs.
sunk
Costs that are beyond recovery at the moment a decision is made are known as ____ costs.
sunk
The benefit of doing activity x, denoted as B(x), is the ____ amount one would be willing to pay to do x.
maximum
When using the cost-benefit test to decide upon an action, it is best to express costs and benefits in
absolute dollar terms
The marginal benefit (or cost) of an activity ____ the average benefit (or cost) of the activity.
may be greater than, equal to, or less than
A benefit that is bestowed upon people who are not directly involved in an activity is called a(n)
external benefit
“Useful predictions about human behavior _____ possible if human actors do not actually undertake the calculations
economists assume to be necessary for optimal decision making. “
are still
An upward sloping marginal cost curve tells us that each additional unit of the activity generates _____.
an ever-larger cost.
“Invisible Hand” shows that a beneficial result is secured for all society when individual producers aim to
advance their own selfish interests
“Invisible Hand” shows that a beneficial result is secured for all society when individual producers aim to
advance their own selfish interests
If the benefit of an activity exceeds its cost…
DO IT
opportunity cost
value of all that must be sacrificed to do the activity
Common pitfalls of decision making
Ignoring Implicit Costs
Failing to Ignore Sunk Costs
Measuring costs/benefits as proportions (not absolute dollar amounts)
Failure to understand average-marginal distinciton
Marginal Cost
the increase is total cost that results from carrying out one additional unit of an activity
Marginal Benefit
the increase in total benefit that results from carrying out one additional unit of an activity
Average Cost
the average cost of undertaking N units of an activity is the total cost of the activity divided by N
Average Benefit
the average benefit of undertaking N units of an activity is the total benefit of the activity divided by
External Cost of an Activity
cost that falls on people who are not directly involved in the activity
normative question
question about what policies or institutional arrangements lead to the best outcomes
positive question
a question about the consequences of specific policies or institutional arrangements
