chapter 1 terms Flashcards
what is a rational person?
A person with well defined goals and tries to fulfill those goals as best as they can.
economic surplus
equals the benefit - the cost
opportunity cost
value of what must be foregone in order to undertake an activity (implicit and explicit cost)
What is Economics?
study of how people make choices under conditions of scarcity and of results of those choices for society.
No-Free-Lunch Principle is an example of what principle?
Scarcity principle
What is the scarcity principle?
We have boundless needs and wants, the resources available to us are limited. So having more of one good means having less of another.
The cost-Benefit Principle?
An individual, firm or society should take an action if and only if the extra benefits from taking the action are at least as great as the extra costs.
What does it mean to be rational?
Have well defined goals and try to fulfill them as best as they can
What is economic surplus?
The difference between the benefit of an action and its cost.
What is your goal as an economic decision maker?
To choose the actions that generate the largest possible economic surplus.
What is an opportunity cost?
Value of what you must sacrifice in making a decision; opportunity cost is only the top alternative not all the alternatives together since you can only have done one of those things anyways.
All costs include what?
Both implicit and explicit cost.
Some economist use opportunity cost to refer to what?
implicit value
- Thus would include $20 to give up babysitting gig you would have done for free
- Does not include the $10 for the movie ticket you would have to buy (explicit cost)
Opportunity cost is the value of what?
Best alternative
What are the three important decision pitfalls which cause individuals to apply the cost-Benefit principle inconsistently?
1) Measuring Cost and Benefits as proportions rather than absolute dollar amounts
2) Ignoring Implicit cost
3) Failure to think at the margin
Why is measuring cost and benefits as proportions rather than absolute dollar amount a pitfall
A benefit of an action is how much you save (benefit) not the proportion you save (benefit)
Many people would say they would walk downtown to but a game that would save them $10 because it would be 40% off but would not for a laptop because it would be only $10 out of 2,020 even though both benefits are equal. This pitfall thinking.
Why is ignoring implicit cost a pitfall?
Many people make bad decisions because they tend to ignore the value of forgone opportunities such as time.
-To avoid this you can translate question into “Should I walk downtown or watch the end of this movie?”
Why is failure to think at the margin a pitfall?
Sometimes people are influenced by costs they ought to ignore such as sunk cost. Cost that would have occurred no matter there choice. Economist should refer to the cost of a unit or benefit of a unit as marginal cost or marginal benefit.
Only cost that should influence a decision about whether to take an action are those we can avoid by not taking the action. The only benefits we should consider are those that would not occur unless the action were taken.
What are sunk cost?
Cost that are beyond recovery at the moment a decision is made.
Money spent on a nontransferable, nonrefundable airline ticket is what?
a sunk cost
At an all you can eat restaurant that cost $10 is an example of what?
A sunk cost; After they paid they have no way of recovering it thus should not influence decision on how much they eat.
You should continue to increase the level of activity as long as what?
The marginal benefit exceeds its marginal cost.
The normative economic principle is an example of what?
Cost-benefit principle?
Normative economic principle provides guidance on what?
How we SHOULD behave
What is a positive/descriptive economic principle?
Describes HOW WE ACTUALLY behave.
What is an incentive principle?
A person (or a firm or a society) is more likely to take an action if it benefit rises and less likely to take it is its costs rises; Incentives matter.
Microeconomics
The study of individual choice under scarcity and implications for the behavior prices and quantities in individual markets
Macroeconomics
The study of the performance of national economics and the policies that governments use to try to improve that performance.
What is an economic naturalist?
Someone who uses insights from economics to help make sense of observations from everyday life.
