The Cost-Benefit Principle

4 Types of Interdependencies

1. dependencies between each of your individual choices 2. dependencies between people or businesses in the same market 3. dependencies between markets 4. dependencies through time

Sunk Costs

a cost that has been incurred and cannot be reversed

Cost-Benefit Principle

an individual 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 Principle

decisions about quantities are best made incrementally

Interdependency 3

dependencies between markets; changes in price and opportunities in one market affect the choices someone might make in other markets

Interdependency 2

dependencies between people/businesses; choices made by other economic actors shapes the choices available to someone else; competing for scarce resources

Interdependency 1

dependencies between your own choices; every choice you make affects the resources available for every other decision since you have limited resources

Interdependency 4

dependencies over time; investors, employers, and workers all get to decide when to invest, hire, and work; choices made always reflect a trade-off across time

Economic Surplus

difference between benefits and costs

Rational Rule

if something is worth doing, keep doing it until the marginal benefits equal the marginal costs

Interdependence Principle

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

Production Possibility Frontier

shows the different sets of outputs that are attainable with scarce resources

Marginal Cost

the cost of producing one more unit of a good

Marginal Benefit

the extra benefit of adding one unit

Scarcity

the problem of limited resources; any resources that someone spends pursuing that leaves fewer resources to pursue others

Opportunity Cost

the true cost of something is the next best alternative you have to give up to get it

Willingness to Pay

what is the most someone is willing to spend to get a benefit or avoid a cost

Framing Effect

when a decision is affected by how a choice is described, or framed; should avoid these altering decisions