Microeconomics Chapter 1

THREE IMPORTANT DECISION PITFALLS

1) pitfall of measuring costs or benefits proportionally 2)pitfall of ignoring implicit costs 3)pitfall of failing to think at the margin

sunk cost

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

equation

a mathematical expression that describes the relationship between two or more variables

constant (or parameter)

a quantity that is fixed in value

variable

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

independent variable

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

dependent variable

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

Cost-Benefit Principle

action should be taken if, but only if, its benefit is at least as great as its cost

no-free-lunch principle

another name for the scarcity principle; comes from the observation that even lunches that are given to you are never really free—somebody, somehow, always has to pay for them

Scarcity Principle

having more of any good thing necessarily requires having less of something else

Incentive Principle

if you want to predict people's behavior, a good place to start is by examining their incentives; 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

positive economic principle

one that predicts how people will behave

normative economic principle

one that says how people should behave

economic naturalist

someone who uses insights from economics to help make sense of observations from everyday life

rational person

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

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

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; tries to understand the determinants of such things as the national unemployment rate, the overall price level, and the total value of national output

average benefit

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

average cost

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

opportunity cost

the value of what must be forgone in order to undertake the activity