Part 1 Flashcards
The Scarcity principle
we have boundless needs and wants the resources available to us are limited. So having more of one good thing usually means having less of another. Leading to trade-offs
The cost-benefit principle
an individual should take an action if, and only if, the extra benefits from taking the action or at least as great as the extra costs.
Economic surplus
the benefit of taking an action minus its cost.
Opportunity cost
the value of what must be forgone to undertake an activity.
Three important pitfalls
1 measuring costs and benefits as proportions rather than absolute dollar amounts
2 minoring implicit costs
3 failure to think at the margin
Sunk cost
cost that is beyond recovery at the moment a decision must be made
Marginal cost
is the increase in total cost that results from carrying out one additional unit of an activity.
Marginal benefit
the increase in total benefit that results from carrying out one additional unit of an activity.
Average cost
is the total cost of undertaking n units of an activity divided by n
Average benefits
is the total benefit of undertaking n units of an activity divided by n
Microeconomics
is the study of individual choice under scarcity and it’s implications for the behavior of of prices and quantities in individual markets.
Absolute advantage
one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person.
Comparative advantage
one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other persons opportunity cost.
The principle of comparative advantage
everyone does best when each person for each country concentrates on the activities for which is or her opportunity cost is lowest.
The principle of increasing opportunity cost (also called the low-hanging-fruit principle)
In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterwards turn to resources with higher opportunity costs.
You should pick the low hanging fruit because it’s faster and easier hence cheaper to pick. It boils down to taking advantage of your most favorable opportunities first.
Substitution effect
The change in the quantity demanded of a good that results because buyers switch two or from substitutes when the price of the good changes.
Buyers reservation price
The sellers reservation price
The largest dollar amount the buyer would be willing to pay for a good
The smallest dollar amount for which a seller would be willing to sell an additional units, generally equal to marginal cost
Buyers surplus
Sellers surplus
Total surplus
Buyers surplus the difference between the buyers reservation price and the price he or she actually pays
Sellers surplus the difference between the price received by the seller and his or her reservation price
Total surplus the difference between the buyers reservation price and the seller’s reservation price
The efficiency principle
efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
The equilibrium principle (also called the no cash on the table principle)
a market in equilibrium leaves no unexploited opportunities for individuals that may not exploit all games achievable through collective action.
