Econ 101: Chapter 1 Flashcards
cost-benefit principle
that costs and benefits are the incentives that shape decisions.
only pursue that choice if the benefits are at least as large as the costs.
Convert costs and benefits into dollars by…
evaluating your willingness to pay
Money is…
the measuring stick, not the objective.
it is a tool for measuring value.
Is the cost benefit principle selfish?
It is not, if you aren’t
Economic surplus
the difference between the benefits you enjoy and the costs you incur.
measures how much a decisions has improved your well-being.
Voluntary exchange
buyers and sellers exchange money for goods only if they both want to.
Think of economic transactions as…
cooperation instead of competition
When an item is on sale…
the price you save from the sale is irrelevant.
Framing effect
small differences in how alternatives are described/framed can lead people to make different choices.
Opportunity cost principle
says that the true cost of something is the next best alternative that you must give up to get it.
When economists say ‘costs’, they really mean…
opportunity costs
Scarcity
you have limited resources, time, income, attention and willpower. Any resources you spend on one thing leaves less resource to pursue others.
There is always a tradeoff.
The “Or What?” trick
apply the opportunity cost principle by posing the question “or” in the middle of the question.
Sunk costs
time, effort, and other costs put into a project that cannot be reversed/recovered.
Sunk costs should be…
ignored when making a decision.
Do count sunk costs when calculating profit.
Production possibility frontier (PPF)
maps out the different sets of output that are attainable with your scarce resources.
How do productivity gains affect the PPF?
It shifts outwards.
Points within the PPF are….?
inefficient; not making full use of resources.
Marginal principle
decisions about quantities are best made incrementally. Break down ‘how many’ decisions into a series of smaller, marginal decisions.
Marginal benefit
the extra benefit from one extra unit of something.
Marginal cost
the extra cost from one extra unit of something.
rational rule
if something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
Interdependence principle
your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future.
1st type of interdependencies
Dependencies between each of your individual choices:
- you have limited resources, so your choice will affect others choices.
2nd type of interdependencies
Dependencies between people or businesses in the same market:
- you are competing for scarce resources, so the choices others make leave less resources for you.
3rd type of interdependencies
Dependencies between markets:
- developments in other markets can positively/negatively effect what choice you make.
4th type of interdependencies
Dependencies through time:
- is it better to act today or tomorrow (expectations about the future)
- choices you make today can be an investment in your future
MCOI
marginal, cost-benefit, opportunity cost, interdependence
Someone else’s shoes technique
to predict what others will do, put yourself in their shoes.
