Econ 2301 Chapter one

what is a trade-off cost

limited money -limited time -limited attention and willpower -limited production resources

Economic surplus is maximized when

marginal benefits equal marginal costs

If the marginal benefit of hiring an extra worker exceeds the marginal cost of the worker, then hiring the worker will boost the total benefit...

more than it boosts the total cost

You can use willingness to pay to convert....

nonfinancial costs or benefits into their monetary equilvalents

You can use willingness to pay to convert...

nonfinancial costs or benefits into their monetary equivalents

You buy a ticket for $12. After 30 minutes watching the movies, you realize its horrible. Do you continue watching or leave? what is this an example of?

(sunk cost) most likely, whatever you do upon leaving the movie will be a more enjoyable use of your time, so leave. Don't let the $12 sunk cost guilt you into staying

Key take-aways to opportunity cost

-it is the most valuable alternative you had to give up to pursue your choice -even if there is no direct financial cost, there is always a cost because every choice has an opportunity cost -scarcity makes opportunity costs (trade-offs) inescapable -Good decision makers ignore sunk costs -PPF can be used to visualize the opportunity costs we face

Key take aways (marginal principle)

-tells you to break 'how many' decisions into a series of smaller, marginal decisions -continue to buy additional units as long as the marginal benefits equal the marginal costs (rational rule) -stop when marginal principle equals the marginal cost -Economic surplus is maximized when marginal benefit equals marginal cost

what are the 4 core principles of economics:

1. Opportunity cost 2. Marginal cost 3. interdependence 4. Cost-benefit principle

Interdependence principles

1. your other choices -can't take other classes offered at the same time 2. Choice's others make -there is now one less spot available than others 3. developments in other markets -makes you a more attractive inter/employees in labor market 4. expectations about the future -you fulfill a prerequisite needed for enrollment in future classes

Dependence between markets (interdependence):

Changes in prices and opportunities in one market affect the choices you might make in other markets: -declining interest rates in the credit market make it less expensive to get a mortgage, which might lead you to buy a home in the housing market -your decision to join the labor market as a worker depends on the availability of high-quality, low-cost childcare options in the childcare market

Rational rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs

Dependence through time (interdependence):

Is it better to act today or tomorrow: -should I buy gas today or next week? My decision depends on whether I think gas prices will fall or not next week. -Decisions today shape future opportunities and decisions: Should I go to Grad school and get my MBA? This decision not only affects your future job opportunities but also your salary

Hiring another worker is beneficial when the marginal benefit of hiring one more worker _______ the marginal cost, meaning that hiring another worker ______ economic surplus...

Exceeds; Increases

Matthew has been diagnosed with cancer and doctors estimate that he has roughly 5 months to live. From an economic standpoint, which BEST explains why Matthew might be more likely than a healthy person to take a risky experimental drug?

His opportunity cost is lower than that of healthy people.

Kyle owns a software company with 20 employees. Because he is not sure whether an 11th employee would improve his economic surplus, he hires another employee and notices that his total costs have increased by$4,500 and his total revenue has increased by $3,000. Which of these would be the best course of action for Kyle?

Let the 11th employee go, or do not replace the next employee who quits.

Evie, a receptionist at a car dealership, asks herself the question, 'should I go back to school or should I continue working at the dealership?' The fact that she is comparing the idea of going to school with her next best option indicates that she is applying the _______ principle...

Opportunity Cost

the production possibility frontier illustrates the trade-offs, or BLANK, people confront when deciding how to best allocate their resources

Opportunity Costs

According to the BLANK, if something is worth doing, you should keep doing it until your marginal benefits equal your marginal costs

Rational Rule

Ella talks about how she applies an economic concept into her situation. She actually would enjoy buying a meal for her friend, but the cost-benefit principle tells her that it would be a cost and not a benefit. As an economist student, how would you explain the cost-benefit principle to her and what she is overlooking?

She earns a nonfinancial benefit from the enjoyment of treating her friend.

Instead of How many workers should I hire, say... (marginal cost)

Should I hire one more worker?

Dependence between economic actors (interdependence):

The choices made by other economic actors (people, businesses, govts, etc.) shape the voices available to you: -If Microsoft hires the most talented tech guy in Seattle, then there will be fewer talented people available for other Seattle-based companies to hire -if your friends all choose to buy iPhone, you may also want to buy one to maximize compatibility across phones -if your classmate gets hired for an internship, then your chances of getting hired at the same company have decreased

You are considering starting a sandwich shop but are comparing that to the idea of staying at your current job instead. Which economic principle are you taking into account?

The opportunity cost principle

example of framing effect

When an items price tag shows both the original price and the sales price. (contains 20% fat or 80% fat free)

When are out-of-pocket costs also opportunity costs?

When the out-of-pocket costs do not exist in the best alternative

Example of Economic Surplus

You gained something worth $3 to you in exchange for something only worth $2. This $1 is your economic surplus.

Dependence among each of your individual choices (interdependence):

Your own choices are all connected because you have limited resources: -your decision on how much you spend on movies will impact how often you eat out because you have limited income -your decision on how much time to dedicate to studying econ. will affect the time available for studying psych. because you have limited time -because you have one oven (limited production capacity) you may not be able to prepare as much food on time

Sunk costs

a cost that has been incurred and cannot be reversed (not an opportunity cost).

calculating opportunity cost

attending school- -tuition-$60,000 -quit your job -apartment and food-$24,000 -10 hours a day studying Work full-time- Don't pay tuition -earn $70,000 -apartment and food-$24,000 -10 hours a day working

Economic surplus =

benefits - Costs

You open a restaurant. How many workers should I hire? (marginal cost)

benefits- -you can prepare and serve more meals (brings in additional revenue) -sell $25 a meal -revenue= $25x meals served Costs- -Additional wages ($3,000 per week per additional worker) -Additional meals=additional ingredients ($10 per added meal)

when individuals have broken a decision into only either/or choices, which two economic principles should they apply?

cost-benefit principle and the opportunity cost principle

The marginal principle

decisions about quantities are best made incrementally. -you should break "how many" questions int a series of smaller, or marginal, decisions weighing the marginal benefits and marginal costs.

The opportunity cost principle allows...

entrepreneurs to evaluate whether or not to start a business (should you start a new business or stay with your existing job?)

Key take aways of the cost-benefit principle

evaluate the full set of costs and benefits for any given choice: -pursue the choice if the benefits are atleast as large as the cost -how much am I willing to pay to enjoy this benefit -avoid being led astray by framing effects

connecting concepts

every additional unit you acquire using the marginal principle will increase your economic surplus.

Everytime you make a decision in accordance with the Cost-benefit principle, you...

generate economic surplus

When someone considers alternatives and all different options available to them before making a decision, they are taking account into the...

opportunity cost principle

Which of these BEST describes what people should base their decisions on?

opportunity costs

Production Possibilities Frontier (PPF)

shows the different sets of output that are attainable with your scarce resources. -it illustrates the trade-offs you confront when deciding how to allocate scarce resources (like time).

According to the cost-benefit principle, a choice should only be pursued when....

the benefits are at least as large as the costs.

According to the cost-benefit principle, a choice should only be pursued when?...

the benefits are atleast as large as the cost

cost-benefit principle

the incentives that shape decisions. Before you make that decision, evaluate the full sets of costs and benefits associated with that choice. pursue that choice only if benefits are atleast as great as the cost

Hire the additional worker when...(marginal cost)

the marginal benefit exceeds the marginal cost

Opportunity cost

the next best alternative you have to give up to get. (or what?) -what did you give up to pursue this option? -you often have to give up more than just money to pursue this option

Why do people watch more movies during an economic turndown

the opportunity cost of your time is lower. You may no longer have a job, or parties/social gatherings, so you watch movies instead

economics

the study of people in the ordinary business life. It is a Lense through which to examine and understand your decision and the decisions of others.

When applying the opportunity cost principle, why is it important to ask, 'or what?'

to determine your next best alternative.

Economic surplus

totaly benefits-total cost measures how much a decision has improved your wellbeing

In opportunity cost, every choice involves a

trade-off cost

example of Cost-Benefit principle

we see the benefits (willingness to pay) exceeds the cost, which is why you bought the granola bar.

willingness to pay

what is the most I am willing to pay to get this benefit (or avoid that cost).

what is my opportunity cost?

whatever you chose to do, you are choosing not to do something else

Framing effect

when a decision is affected by how a choice is described or framed. It can make identical choices seem different

According to the cost-benefit principle, under what conditions should a business owner hire an additional worker?

when marginal benefit is greater than or equal to marginal cost

Your friends asks you to check out his favorite store because there is a big sales event going on. As an economics student, when should you buy the product?

when the sales price is below or as much as your willingness to pay

Which of these would indicate that in order to increase production of a good, you need to decrease production of another good?

you are producing at a point on your production possibility frontier.