Core Principles of Economics

Question 1

What are the 4 core principle of economics?

Answer 1

Cost-benefit principle
Opportunity cost principle
Marginal principle
Interdependence principle

Question 2

What is the cost-benefit principle?

Answer 2

It says that you should evaluate the full set of costs and benefits of any choice

Question 3

When should you pursue a choice?

Answer 3

When benefits are at least as large as their costs

Question 4

How do you compare intangible benefits to monetary costs?

Answer 4

Convert each cost and each benefit into it’s monetary equivalent

Question 5

What is your willingness to pay for a good/or service?

Answer 5

It’s how much you value a good or service. It depends on how much you like the good not the price

Question 6

What is money in this context?

Answer 6

Money is used to measure intangible benefits and compare them to costs. It allows you to take into account a wide variety of non-financial issues such as satisfaction or time

Question 7

What is economic surplus?

Answer 7

The total benefits minus the total costs flowing from a decision

Question 8

What is opportunity cost?

Answer 8

The cost of sacrificing the next best alternative due to limited resources.

Question 9

Why does opportunity cost arise?

Answer 9

SCARCITY. Wants are infinite/unlimited but resources are finite

Question 10

What is the opportunity cost formula?

Answer 10

Costs of choice - cost of next best alternative

Question 11

What is a sunk cost?

Answer 11

A cost that has been incurred and cannot be reversed

Question 12

Give 2 examples of sunk cost

Answer 12

Advertising, Rent

Question 13

When weighing up costs and benefits, what does a goo decision ignore?

Answer 13

Sunk costs

Question 14

What is the PPF?

Answer 14

Maximum output an economy can achieve when resources are fully employed. Shows the different outputs from the combination of 2 goods/or services

Question 15

List 3 examples of scarce resources

Answer 15

Time, money, raw inputs

Question 16

Define marginal benefit

Answer 16

The extra benefit from the consumption of an extra good/or service

Question 17

Define marginal cost

Answer 17

The extra cost from one extra unit

Question 18

When is the marginal principle useful and not useful?

Answer 18

Useful for ‘how many’ decisions but not ‘either/or’ choices

Question 19

What is the cost benefit useful for?

Answer 19

For ‘either/or’ choices

Question 20

So when should you buy one more good?

Answer 20

When marginal benefit is greater than cost

Question 21

What does the marginal principle provide?

Answer 21

A rule of thumb that will help you maximise your economic surplus

Question 22

Define rational rule

Answer 22

If something is worth doing, keep doing it until your marginal benefits equal marginal cost.

Question 23

What is the interdependence principle?

Answer 23

Your best choice depends on the other choices you make, the choices others make, developments in other markets and expectations about the future.

Question 24

What are the 4 types of interdependencies?

Answer 24

Dependencies between each of your individual choices
Dependencies between people or businesses in the same market
Dependencies between markets
Dependencies through time

Question 25

What is the 4 step core principles in practice?

Answer 25

Use the marginal principle by breaking down ‘how many’ choices into simpler marginal choices
Apply the cost-benefit principle by assessing whether the marginal benefit exceeds the marginal cost
Apply the opportunity cost to evaluate all relevant costs and benefits, and ask ‘or what?’
Use the interdependence to identify how changes in other factors might lead you to make a different decision