The Core Principles of Economics Flashcards
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. Benefit beat cost?
Cost-benefit Principle
In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: “What is the most I am willing to pay to get this benefit (or avoid that cost)?”
Willingness to Pay
The total benefits minus total costs flowing from a decision. It measures how much a decision has improved your well-being.
Economic Surplus
When a decision is affected by how a choice is described, or framed. You should avoid framing effects altering your own decisions.
Framing Effect
The true cost of something is the next best alternative you have to give up to get it. Or what?
Opportunity Cost
The problem that resources are limited.
Scarcity
A cost that has been incurred and cannot be reversed. A sunk cost exists whatever choice you make, and hence it is not an opportunity cost. Good decisions ignore sunk costs.
Sunk Cost
Shows the different sets of output that are attainable with your scarce resources.
Production Possibility Frontier (PPF)
Decisions about quantities are best made incrementally. You should break “how many” questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs. One more?
Marginal Principle
The extra benefit from one extra unit (of goods purchased, hours studied, etc.).
Marginal Benefit
The extra cost from one extra unit.
Marginal Cost
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
Rational Rule
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 changes, your best choice might change. What else?
Interdependence Principle
By mentally “trading places” with someone so that you understand their objectives and constraints, you can forecast the decisions they will make.
Someone Else’s Shoes Technique
