Econ 101: Chapter 1

Question 1

cost-benefit principle

Answer 1

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.

Question 2

Convert costs and benefits into dollars by…

Answer 2

evaluating your willingness to pay

Question 3

Money is…

Answer 3

the measuring stick, not the objective.

it is a tool for measuring value.

Question 4

Is the cost benefit principle selfish?

Answer 4

It is not, if you aren’t

Question 5

Economic surplus

Answer 5

the difference between the benefits you enjoy and the costs you incur.

measures how much a decisions has improved your well-being.

Question 6

Voluntary exchange

Answer 6

buyers and sellers exchange money for goods only if they both want to.

Question 7

Think of economic transactions as…

Answer 7

cooperation instead of competition

Question 8

When an item is on sale…

Answer 8

the price you save from the sale is irrelevant.

Question 9

Framing effect

Answer 9

small differences in how alternatives are described/framed can lead people to make different choices.

Question 10

Opportunity cost principle

Answer 10

says that the true cost of something is the next best alternative that you must give up to get it.

Question 11

When economists say ‘costs’, they really mean…

Answer 11

opportunity costs

Question 12

Scarcity

Answer 12

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.

Question 13

The “Or What?” trick

Answer 13

apply the opportunity cost principle by posing the question “or” in the middle of the question.

Question 14

Sunk costs

Answer 14

time, effort, and other costs put into a project that cannot be reversed/recovered.

Question 15

Sunk costs should be…

Answer 15

ignored when making a decision.

Do count sunk costs when calculating profit.

Question 16

Production possibility frontier (PPF)

Answer 16

maps out the different sets of output that are attainable with your scarce resources.

Question 17

How do productivity gains affect the PPF?

Answer 17

It shifts outwards.

Question 18

Points within the PPF are….?

Answer 18

inefficient; not making full use of resources.

Question 19

Marginal principle

Answer 19

decisions about quantities are best made incrementally. Break down ‘how many’ decisions into a series of smaller, marginal decisions.

Question 20

Marginal benefit

Answer 20

the extra benefit from one extra unit of something.

Question 21

Marginal cost

Answer 21

the extra cost from one extra unit of something.

Question 22

rational rule

Answer 22

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

Question 23

Interdependence principle

Answer 23

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

Question 24

1st type of interdependencies

Answer 24

Dependencies between each of your individual choices:
- you have limited resources, so your choice will affect others choices.

Question 25

2nd type of interdependencies

Answer 25

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.

Question 26

3rd type of interdependencies

Answer 26

Dependencies between markets:
- developments in other markets can positively/negatively effect what choice you make.

Question 27

4th type of interdependencies

Answer 27

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

Question 28

MCOI

Answer 28

marginal, cost-benefit, opportunity cost, interdependence

Question 29

Someone else’s shoes technique

Answer 29

to predict what others will do, put yourself in their shoes.