ECO2013 Chapter 1

What are the five foundations of economics?

Incentives, trade-offs, opportunity cost, marginal thinking, trade creates value

What is another name for No-Free-Lunch Principle

The Scarcity Principle

The Cost-Benefit Principle states that an individual or society should take an action if and only if...

The extra benefits from taking the action are at least as great as the extra costs

Equation

a simple mathematical expression that describes the relationship between two or more variables, or quantities that are free to assume different values in some range

A Dependent Variable

a variable in an equation whose value is determined by the value taken by another variable in the equation

Slope

in a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)

Vertical Intercept

in a straight line, the value taken by the dependent variable when the independent variable equals zero

Normative Economic Principle

one that says how people should behave

Rise/run

slope

Rational Person

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

Economic Surplus

the benefit of taking an action minus its cost

Marginal cost

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

What is 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 markets

Macroeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance

Average Benefit

the total benefit of undertaking n units of an activity divided by n

The Incentive Principle

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

In the graph of a line, an increase in the vertical intercept will lead to:

An upward parallel shift

Dependent Variable

a variable in an equation whose value is determined by the value taken by another variable in the equation

Marginal Benefit

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

The Scarcity Principle

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Sunk cost

a cost that is beyond recovery at the moment a decision must be made

Constant

a quantity in an equation that is fixed in value, not free to vary

Variable

a quantity that is free to take a range of different values

When assessing the costs and benefits associated with taking an action, it is generally best to consider costs and benefits:

as absolute dollar amount rather than proportions

Average Cost

the total number cost of undertaking n units of an activity divided by n

Opportunity Cost

the value of what must be forgone to undertake an activity

Economic models are_________ if people do not consciously weigh costs and benefits when making decisions

useful even

Independent Variable

A variable in an equation whose value determines the value taken by another variable in the equation

A fundamental tool for the study of how rational people make choices

The Cost-Benefit Principle

When deciding whether to take an action, one common decision pitfall is to

ignore the implicit cost of the action

Under this definition, all costs-both ________ and ___________ are opportunity costs

implicit and explicit

Positive (or descriptive) Economic Principle

one that predicts how people will behave

When making a decision, sunk costs

should be ignored

The Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Economists view scarcity as...

An unavoidable fact of life

Parameter

Constant

Another way to say Positive Economic Principle

Descriptive economic principle