Stevenson and Wolfers, "A Principled Approach to Economics" Flashcards
What is the foundation of all economic forces, according to economists?
Individual decisions and choices
What is the basis of the Cost-Benefit Principle?
Costs and bene fits are the incentives that shape decisions. You should evaluate
the full set of costs and bene fits of any choice, and only pursue those whose benefi ts are
at least as large as their costs
The Cost-Benefit Principle suggests you should do what, before making any decision?
(2 points)
- Evaluate the full set of costs and benefits associated with that choice
- Pursue that choice, only if the benefits are at least as large as the costs
What is the Cost-Benefit Principle strategy?
To convert each cost and benefi t into its money equivalent, simply assess your willingness to pay. That is, ask yourself, what is the most that you would be willing to
pay in order to obtain a particular benefi t or to avoid a particular cost?
What is the basis of the Opportunity Cost Principle?
Costs and benefi ts are the incentives that shape decisions. You should evaluate
the full set of costs and bene fits of any choice, and only pursue those whose bene fits are
at least as large as their costs
What does the Opportunity Cost Principle highlight and rely on?
The concept of scarcity; if resources were abundant, a choice would not necessarily have to be made between two things
The Opportunity Cost Principle suggests you should consider what, before making any decision?
(2 points)
- What happens if you pursue your choice?
- What happens under your next best alternative?
What are the Opportunity Cost Principle’s main lessons?
(4 points)
- Some out-of-pocket costs are opportunity costs
- Opportunity ghosts need not involve out-of-pocket financial costs
- Not all out-of-pocket costs are real opportunity costs
- Some non nancial costs are not opportunity costs
What is a sunk cost and is it important?
A sunk cost is something that has been incurred and cannot be reversed. It exists no matter what choice you make and thus, are not important in this context
What is the basis of 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 a marginal benefit and a marginal cost?
Marginal benefit; the extra benefit from one extra unit
Marginal cost; the extra cost from one extra unit
What is the Marginal Principles’ rule of thumb?
This is called the Rational Rule, which states that if something is worth doing, keep doing it until your marginal benefit equals your marginal cost
