Thinking like an economist Flashcards
Reservation price of activity x
The price at which a person would be indifferent between doing x and not doing x
Sunk cost
Costs that are beyond recovery at the moment a decision is made
Marginal cost
The increase in total cost that results from carrying out one additional unit of activity
Marginal benefit
The increase in total benefit that results fro carrying out one additional unit of activity
Average cost
The average cost of undertaking n units of an activity is the total cost of the activity divided by n
Average benefit
The average benefit of undertaking n units of an activity is the total benefit of the activity divided by n
External cost of an activity
A cost that falls on people who are not directly involved in the activity
Normative question
A question about which policies or institutional arrangements lead to the best outcomes (A question about what ought to be or what should be)
Positive questions
A question about the consequences of specific policies or institutional arrangements
Microeconomics
The study of individual choices and the study of group behaviour in individual markets
Macroeconomics
The study of broader aggregates of markets
Typical errors
- Ignoring implicit costs
- Failing to ignore sunk costs
- Failing to understand the average-marginal distinction
