Principles of Economics "Course 111" Chapter 1

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society.

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual matters.

Macroeconomics

The study of the performance of national economies and the policies that government use to try to improve that performance.

Average Benefit

The total benefit of undertaking "n" units of an activity divided by "n".

Average Cost

The total cost of undertaking "n" units of an activity divided by "n".

Opportunity Cost

The value of what must be forgone to undertake an activity.

Sunk Cost

A cost that is beyond recovery at the moment a decision is being made.

Positive Economic Principle

An economic principle that predicts how people will behave.

Normative Economic Principle

An economic principle that says how people should behave.

Incentive Principle

An individual or group is more likely to take an action if it's benefits rise, and less likely to take it if its costs rise. Incentives impact decisions.

The Cost-Benefit Principle

An individual or group should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Marginal Cost

The increase in total cost that results from carrying out one additional unit of an activity.

The Scarcity Principle (No-Free-Lunch Principle)

Due to the fact that resources are by definition limited, having more of one good thing usually means having less of another.

Three Important Decision Pitfalls

Faulty comparison of cost and benefits (mainly making proportional reasoning on an absolute dollar amount), failure to take into account implicit costs, and failing to think at the margin (incorporating sunk costs into a cost benefit analysis for making an action or failing to compare marginal costs and benefits).

Economic Naturalist

Someone who uses insights from economics to help make sense of observations from everyday life.

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best as he or she can.

Economic Surplus

The benefit of taking an action minus its cost.

Marginal Benefit

The increase in total benefit that results from carrying out one additional unit of an activity.