Chapter 1 (Intro) Flashcards
What is Economics all about?
Economics is a way of thinking, and gives insight onto why 1) businesses make the choices they make and 2) you make the choices you make in your everyday life
What are the four core principles in economics?
1.The cost-benefit principle
2.The Opportunity Cost Principle
3. The Marginal Principle
4. The Interdependence Principle
What is the cost-benefit principle?
A concept that suggests action should only be taken if the benefits derived from something is greater than the costs. (positive trade-offs)
What is a trade-off?
Exchange something of value, especially as part of a compromise
how do you utilize the “willingness to pay” method?
By converting nonfinancial costs or benefits into their monetary equivalents
What does “Economic surplus” mean in terms of the cost-benefit principle?
The total benefits minus the total costs flowing from a decision.
Ex. Buying a granola bar for $2 when it is worth $3 to you: hence, your economic surplus is $1
Who can generate economic surplus?
Both the seller and the supplier
What is the Framing Effect?
When a decision is affected by how a choice is described or framed
ex. “The item cost more in the past so i should buy it now”
ex. a restaurant has one outrageously priced item to make the other meals appear cheap in comparison
What does Opportunity Cost mean?
The true cost of something is the next best alternative you have to give up to get it
If you have a list of things to do in order of importance:
- Work on homework
- Hang out with friends
- Watch one piece
- Take a nap
If you decide to do #1, what is your opportunity cost?
2 which is hanging out with friends
What does Scarcity mean?
Resources are limited and therefore any resources you spend pursuing one activity leaves fewer resources to pursue others
What does the phrase “no free lunch” mean?
There is an opportunity cost of time it takes to get a “free” lunch
What is a Sunk Cost?
A cost that has been incurred and cannot be reversed. A sunk cost exists in whatever choice you make, and hence it is NOT an opportunity cost
T/F Good decision makers ignore Sunk Costs
True
Is there a trade-off to Sunk Costs?
No, because the choice has already been madee
What does Production Possibilities Frontier (PPF) show?
- It shows the different sets of output that are attainable with you scarce resources
- Illustrates the possible trade-offs you confront when deciding how to allocate you scarce resources (like your time)
What does moving along the PPF line or curve reveal?
You opportunity costs
What does it mean if you are either below or beyond you PPF curve?
- If you’re below your PPF, you are using your resources inefficiently
- If you’re beyond your PPF, you can’t be because it is unattainable unless you increase your productivity in some way
What does Marginal Principle mean?
-Decisions about quantities are best made incrementally
- You should break “how many” questions into a series of smaller, or marginal, decision by weighing the marginal benefits and marginal costs
What does Marginal Benefit mean?
The extra benefit from one extra unit (of goods purchased, hours studied etc)
What does Marginal Cost mean?
The extra cost from one extra unit
What does the Rational Rule state?
If something is worth doing, keep doing it iteratively until your marginal benefits equal your marginal costs
When is Economic Surplus maximized?
When the marginal benefit equals the marginal cost
What is a business?
An organization that produces or sells goods and/or services to make a profit
Profit Equation?
Revenue - Costs
When do you stop marginal benefit?
When the marginal benefit equals the marginal cost
What does the Interdependence Principle state and what are the four things it depends on/
Your best choice, which depends on 1) your other choices 2) the choices others make 3) developments in other markets 4) expectations about the future
Will changes in prices and opportunities in one market affect the choices you might make in other markets?
Absolutely
What are the flaws of a casual relationship?
Correlations can exist in the world that do not make sense ie) coincidence
