Exam 1; 9/26 Flashcards
Cost benefit principle
The principle of weighing all costs & benefits to base your decision off which is greater
Willingness to pay
Maximum monetary amount you are willing to spend on a product
Economic Surplus
Total benefits minus total costs from a decision
Opportunity Cost Principle
The principle of the true cost of something being the next best alternative you are giving up
Scarcity
Understanding that resources are limited
Sunk cost
a cost that has been incurred and cannot be reversed
Marginal Principle
breaking “how many” decisions down into smaller parts, weighing marginal benefits & costs, incremental decisions
Marginal Benefit
extra benefits from one additional unit
Marginal cost
Extra cost from one additional unit
Interdependence principle
The principle of your best choice depending on your other choices/choices of others
Ceteris Paribus
Latin for “Holding other things constant”
Law of demand
tendency for demand to be higher when price is lower
Rational rule for buyers
Keep buying until price equals marginal benefit
Rational rule for sellers
Keep selling until price equals marginal cost
Four step process of Market Demand?
Survey, add up total quantity demanded at each price by all customers, scale up, plot quantity demanded at each price
Six demand shifters?
income, preferences, prices of related goods, expectations, congestion & network effects, type & number of buyers
Normal Good
Higher income causes an increase in demand
Inferior good
higher income causes a decrease in demand
Complementary good
Good that goes well with another good
Substitute good
goods that can replace one another
5 Supply shifters?
Input prices, productivity and technology, prices of related outputs, expectations, the type & number of sellers
Complements in production
Goods that are made together
Substitutes in production
alternative uses of resources
Perfectly competitive market
A market where all firms in an industry sell the same good, and there are lots of buyers and sellers
Planned economy
Centralized decisions are made regarding what is produced, by whom, how, and who gets what
Market economy
Each individual makes their own production & consumption decisions, buying and selling in markets
Equilibrium
Where quantity supplied meets quantity demanded
