Chapter 1

Cost Benefit Principle suggests

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 else?

The interdependence principle

step four

The interdependence principle helps you identify how changes in other factors—in your own choices, other people, other markets, and expectations about the future—might lead you to make a different decision.

One more?

The marginal principle

frontier

describes the most that you can produce given your current circumstances

marginal cost

extra cost of that worker

someone else's shoes technique

putting yourself in someone else's shoes is to allow yourself to have an empathetic understanding of how someone else views the world

marginal principle

decisions about quantities are best made incrementally, a decision about how many of something to choose it is always easier to break it into a series of smaller, or marginal, decisions

marginal benefit

the extra benefit you get from one more worker

sunk costs

the time, effort, and other costs you put into the project cannot be reversed, not opportunity costs

interdependence principle

your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future

step one

use the marginal principle by breaking "how many" choices down into simpler marginal choices. Ask yourself whether you would be better off doing a bit more of something, or a bit less.

Rational Rule

Choose the quantity where the marginal benefit equals the marginal cost. That way, you will maximize your economic surplus.

willingness to pay

Convert costs and benefits into dollars by evaluating your willingness to pay. what is the most that you would be willing to pay in order to obtain a particular benefit or to avoid a particular cost?

four types of interdependencies

Dependencies between each of your individual choices Dependencies between people or businesses in the same market Dependencies between markets Dependencies through time

MCOI

Marginal, then Cost-benefit, Opportunity cost, and Interdependence

Benefit beat cost?

The cost-benefit principle

society's scarce resources

The more others get, the less that's left over for you

Or what?

The opportunity cost principle

two types of "what else?" questions

What else might my decision affect? What else might affect my decision?

evaluating your opportunity cost

What happens if you pursue your choice? What happens under your next best alternative?

Cost Benefit question to ask yourself

What is the most that you would be willing to pay in order to obtain a particular benefit or to avoid a particular cost? convert into money equivalent

economic surplus

a measure of how much your decision has improved your well-being, The difference between the benefits you enjoy and the costs you incur.

scarcity

Your resources are limited, always face a trade-off

either or

apply the cost-benefit principle and the opportunity cost principle

step two

apply the cost-benefit principle by assessing the relevant costs and benefits. Since you're analyzing a marginal question, this says you need to assess whether the marginal benefit exceeds the marginal cost.

step three

apply the opportunity cost principle and ask, "Or what?" This ensures that you take full account of what you give up when you make a choice. You should focus on the relevant opportunity costs, not just financial out-of-pocket costs.

different markets

changes in prices and opportunities in one market affect the choices you might make in other markets

Cost Benefit Principle

costs and benefits are the incentives that shape decisions. relevant for literally any choice that you might consider

forgone

give up something to do something else, ___ interest, _____ earnings

production possibility frontier

maps out the different sets of output that are attainable with your scarce resources. It illustrates the trade-offs—that is, the opportunity costs—you confront when deciding how best to allocate scarce resources like your time, money, raw inputs, or production capacity.

"how many" choice, you should break it down into a series of smaller decisions until its either or

marginal principle

framing effect

small differences in how alternatives are described, or framed, can lead people to make different choices

opportunity cost principle

think about its alternative uses. It tells you to assess the consequences of your choice relative to the best of your alternatives, this OR that

true/false, Both buyers and sellers benefit from voluntary exchange, as long as they each follow the cost-benefit principle

true

on your production possibility frontier

you can't produce more of one output unless you produce less of the other