Chapter One: Thinking Like An Economist

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.

Sunk Cost

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

The Incentive Principle

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

Cost-Benefit Principle

An individual (or firm 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.

Average Cost

The total cost of undertaking n units of an activity divided by n.

Pitfall #3

Failure to ignore sunk costs. The only costs that should influence a decision about whether to take an action are those that we can avoid by not taking the action.

Pitfall #4

Failure to understand the average-marginal distinction. It is about the extent to which an activity must be pursued. Economists refer to the cost of an additional unit of activity as the marginal cost of the activity. The benefit of an additional unit of the activity is the marginal benefit of the activity.

Pitfall #2

Ignoring opportunity costs. The opportunity cost of an activity is the value of the next-best alternative that must be forgone in order to engage in that activity.

Pitfall #1

Measure costs and benefits as proportions rather than absolute dollar amounts.

Positive Economic Principle

One that predicts how people will behave.

Normative Economic Principle

One that says how people should behave.

Rational Person

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

Economics

Study of how people make choices under conditions of scarcity and of the results of those choices for society.

Economic Surplus

The economic surplus from taking any action is the benefit of taking that action minus its cost.

Marginal Benefit

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

Marginal Cost

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

Opportunity Cost

The opportunity cost of an activity is the value of the next-best alternative that must be forgone in order to undertake the activity.

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.

Scarcity Principle/No-Free-Lunch Principle

having more of one good thing means less of another.