Econ Ch 1
4 types of interdepencies
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
What're the 4 core principles of
1. the cost benefit principle 2. the opportunity cost principle 3. the marginal principle 4. the interdependence principle
Decisions about are best made incrementally
Marginal Principle
when we use resources for one thing are we able to use them for another?
NO
what is a sunk cost
a cost that has been incurred and cannot be reversed
4 step process in order you should use when confronted with a problem
1. Marginal Principle 2. Cost Benefit 3. Opportunity Cost 4. Interdependencie Principle (MCOI)
Opportunity costs reflect
scarcity
Marginal benefit
the extra benefit from one unit (of goods purchased, hours studied, etc)
Marginal cost
the extra cost from one extra unit
Your best choice depends on the other choices you make, the choices others make, developments in other markets, and expectations about the future.
the interdepence principle
the cost-benefit principle says to evaluate the full set of costs and benefits of any choice and to pursue only those choices whose ______________ are at least as large as their _______
benefits are atleast as large as their costs
_____________________-___________________= opportunity cost
cost of choice - cost of next best alternative
When you follow the __________________________ ,every decision you make will yield larger benefits than costs.
cost-benefit principle
apply the marginal principle first, then the
cost-benefit principle
which principle is best for either/or decision
cost-benefit principle
You decide that reading the textbook tonight will lay the foundation for your later success in your economics class. Which of the four types of interdependencies is this?
dependencies through time
following the rational rule maximizes
economic surplus
refers to how different alternatives are described or framed
framing
economic surplus
is the total benefits minus the total costs flowing from a decision.
According to the marginal principle (and the rational rule), economic surplus is maximized when
marginal benefit =marginal cost
profit is maximized when
marginal benefit=marginal cost
The ________________ provides a rule of thumb that will help you maximize your economic surplus.
marginal principle
a common measuring stick that allows you to compare a wide variety of costs and benefits
money
If an economy is using its resources efficiently, then
more of one good can be produced only if production of another is given up.
can you produce outside your ppf
only if you change something
Ex: You decided to come to class today. What is the best alternative that you were forced to give up as a result of your decision?
opp. cost
when economists say "costs" they really mean
opportunity costs
To apply the opportunity cost principle correctly, ask yourself
or what?
If something is worth doing, keep doing it until your marginal benefits equals your marginal costs
rational rule
what exists whether or not you've made your choice
sunk cost
WHEN MAKING A DECISION ALWAYS IGNORE
sunk costs
opportunity cost
the true cost of something is the next best alternative you must give up to get it
opportunity costs also focus on
trade-offs
the marginal principle is useful for "_____ ______" decisions but not for "__________" choices
useful for "how many" but not for either/or
how can you visualize opportunity costs
using the production possibilities frontier (PPF)
how much you value your good
willingness to pay
can you produce inside you PPF
yes
what reflects your opportunity cost more than money
your decisions
