Economics Chapter 1
Your best choice depends on...
1. Your other choices 2. The choices others make 3. Developments in other markets. 4. Expectations about the future.
Sunk Cost
A cost that has been incurred and cannot be reversed. It is not an opportunity cost.
Economics
A systematic framework for making decisions.
Your answer to "or what", is?
Opportunity cost
Every choice involves a trade-off. Every choice was a cost. Why?
Because everyone deals with issues of scarcity.
Cost-Benefit
Consider costs and benefits for a choice
You take a job driving for Lyft. It's a slow night and you are trying to decide whether to continue working or go home. You should
Continue working until the marginal benefit you receive from working additional time equals your marginal cost of working additional time.
How do you quantify the enjoyment you get from a purchase?
Determine the maximum you are willing to pay for the item.
How to quantify the enjoyment you get from a purchase?
Determine the maximum you are willing to pay for the item.
Marginal Benefit
Extra benefit from one extra unit.
The interdependence Principle
How your decision interacts with everything and everyone else around you.
Pursue the choice of buying an item if?
If the benefits are at least as large as the costs.
Edward charges $100 to landscape his neighbors' lawns. His neighbors should hire Edward if...
If the marginal benefit of having their law landscaped is greater than $100.
Scarcity
Resources are limited, therefore any resources you spend pursuing one activity leaves fewer resources to pursue others.
Competing against other potential employees for a job is an example of the _______ set of interdependencies.
Second
You are launching a new consulting business and you need to decide how many employees to hire. Applying the marginal principle, what question should you consider?
Should I hire one more employee?
Marginal Cost
The extra cost from one extra unit.
A factor that may cloud your decision making is?
The framing effect
The opportunity-cost principle
The next best alternative. Consider the opportunity cost rather than just out-of-pocket financial costs.
You should only hire the additional workers if the marginal benefits exceeds the marginal cost.
True
Do good decision makers ignore sunk cost?
Yes
The Marginal Principle
You should break "how many" questions into a series of smaller, marginal, decisions weighing the marginal benefits and costs.
Can money, time, attention, willpower, and production resources be issues of scarcity?
yes
