econChap1 Flashcards
What is the Cost-Benefit Principle in economics?
It states that costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.
What is the Opportunity Cost Principle?
The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.
What is the Marginal Principle?
Decisions about quantities are best made incrementally. You should break “how many” decisions down into a series of smaller, or marginal, decisions.
What is the Interdependence Principle?
Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change.
What is economic surplus?
The difference between the benefits you enjoy and the costs you incur from a decision.
What is the Rational Rule?
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
What is the Production Possibility Frontier (PPF)?
A curve that maps out the different sets of output that are attainable with your scarce resources, illustrating the trade-offs and opportunity costs when allocating resources.
What are sunk costs?
Costs that have already been incurred and cannot be reversed. Good decision makers ignore sunk costs.
What is the opportunity cost of buying a car, according to Nerida’s example?
The total cost of owning the car for one year is $6,726, which exceeds the $4,700 benefit of not paying for Uber, resulting in an economic surplus of $2,026 by taking Uber instead.
What is the framing effect?
A phenomenon where small differences in how alternatives are described or framed can lead people to make different choices.
How does the cost-benefit principle relate to nonfinancial costs?
It requires thinking broadly about all costs and benefits, including nonfinancial aspects like satisfaction or time.
How does the opportunity cost principle reflect scarcity?
Because resources are limited, making one choice requires giving up another, highlighting the trade-offs due to scarcity.
What is the “or what” trick?
A method to apply the opportunity cost principle by always asking “or what” to compare a choice to its next best alternative.
How should entrepreneurs think about opportunity costs?
By considering not just financial costs but also the opportunity costs of time and money invested in their business compared to alternatives.
What is the benefit of converting costs and benefits into dollars?
It allows for comparing different aspects of a decision by evaluating willingness to pay, making it easier to apply the cost-benefit principle.
What is the economic method’s four-step process?
- Use the marginal principle to break down decisions.
- Apply the cost-benefit principle.
- Use the opportunity cost principle by asking ‘Or what?’.
- Apply the interdependence principle to consider other factors.
What does the Rational Rule help you maximize?
Your economic surplus, which is the difference between the benefits you enjoy and the costs you incur.
What happens when marginal benefits exceed marginal costs?
Hiring an additional worker or making an additional choice increases your economic surplus.
What should you do when marginal benefits equal marginal costs?
Stop making additional choices, as you have maximized your economic surplus.
What is the significance of the Production Possibility Frontier being a straight line in Nerida’s example?
It indicates constant opportunity costs between studying economics and psychology.
How do productivity gains affect the Production Possibility Frontier?
They shift the frontier outward, allowing more output with the same resources.
What is the main lesson of applying the cost-benefit principle correctly?
To think broadly about the full set of costs and benefits involved in your choices.
Why is it important to account for unselfish motivations in the cost-benefit principle?
Because they are significant nonfinancial benefits that should be included in your cost-benefit analysis.
What is the relationship between the four core principles of economics?
They provide a systematic framework for analyzing individual decisions and making better choices.
How does the opportunity cost principle help in decision making?
It ensures that you consider the best alternative you give up, leading to more informed and effective choices.
What is the consequence of ignoring the interdependence principle?
You may miss how changes in other factors affect your best choice, leading to suboptimal decisions.
How does the interdependence principle relate to different markets?
Changes in one market can affect decisions and outcomes in another, showing the interconnectedness of economic activities.
What is an example of a sunk cost in everyday life?
Paying for a movie ticket and deciding whether to stay if you’re not enjoying the film.
Why do people with terminal illnesses sometimes opt for experimental drugs?
Because the opportunity cost of not trying the drug is higher due to the severity of their condition.
What is the economic rationale behind fewer stay-at-home moms today?
The rising opportunity cost of staying home as women’s wages and the cost of housing have increased.
How can the Marginal Principle be applied to studying for an exam?
By deciding whether to study one more hour based on whether the additional benefit exceeds the additional cost.
What is the key to using the cost-benefit principle properly?
To think broadly about all the costs and benefits, including nonfinancial ones.
How do framing effects impact decision making?
They can cause people to make inconsistent choices based on how options are presented, rather than on actual costs and benefits.
What should you do when faced with a ‘how many’ decision?
Break it down into a series of marginal ‘either/or’ decisions and apply the cost-benefit principle to each.
What role does the interdependence principle play in predicting others’ decisions?
It helps you understand that others’ choices affect your best options and vice versa.
How does scarcity relate to the opportunity cost principle?
Scarcity forces you to make trade-offs, making opportunity costs an essential consideration in decisions.
What is the economic surplus in Nerida’s car vs. Uber decision?
$2,026 by choosing Uber over buying the car.
Why should sunk costs be ignored in decision making?
Because they cannot be reversed and do not affect the opportunity costs of current decisions.
What does the Production Possibility Frontier illustrate about resource allocation?
It shows the maximum possible output combinations of two goods that can be produced with available resources.
How does the Marginal Principle simplify ‘how many’ choices?
By breaking them down into smaller ‘either/or’ decisions about one additional unit at a time.
What is the main takeaway from the four core principles of economics?
They provide a foundational framework for analyzing and making informed decisions in various aspects of life.
