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