Week 1: Basics (Econ Final)

$4

Kevin Williamson goes to a local coffee shop and orders a medium-sized latte. His willingness to pay for that latte is $6. The price of the latte is $2. The cost to the coffee shop to produce the latte is $1. How much economic surplus does Kevin gain when he purchases the latte?

Marginal Principle

decisions are easier to make when you break it down into smaller decisions.

Marginal Benefit

the extra benefit from one extra unit (of goods purchased, hours studied, etc)

Marginal Cost

the extra cost from one extra unit

opportunity cost principle

"Or What?"

Cost-Benefit Principle

"either/or"

Marginal Principle

"how many"

Constant

A _____ opportunity cost is a downward sloping, linear ppf curve. Everything under the curve is attainable, but inefficient. Every point ON the curve is attainable AND efficient. Everything outside/above the curve is unattainable.

increasing

An ______ opportunity cost is a downward sloping, curved ppf curve

What are the 4 core principles of economics?

Cost-benefit principle Opportunity cost principle Marginal Principle Interdependence principle

Opportunity cost principle

If you make one choice, what is the next best alternative that you're forced to give up?

The marginal principle

Decisions about quantities are best made incrementally. You should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

Production Possibilities Frontier (PPF)

Depending on the production process, the tradeoff might involve constant opportunity costs or increasing opportunity costs. It maps out the different sets of output that are attainable with your scarce resources

Cost Benefit Principle

Evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs

shifted right, is unchanged (higher productivity pushes out your ppf)

Gabriella starts using a new baking technique, and she can now do twice as much of everything. In a single day, Gabriella can now bake 10 muffins or eight cookies, rather than the five muffins and four cookies she could previously bake. Gabriella's production possibility frontier has _____, and her opportunity cost of making cookies _____.

The Rational Rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

Markets

MB = MC is the Rational Rule for _______

Buyers

MB = Price is the Rational Rule for ______

Sellers

MC = Price is the Rational Rule for _____

opportunity

The ________ costs of attending college include the potential income that could be earned working.

Marginal Benefit

The demand curve represents a buyers ____

scarcity

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

Opportunity cost principle

The true cost of something is the next best alternative you must give up to get it.

Decreasing

There is no such thing as a _____ opportunity cost in a ppf

The Price Mechanism ( the invisible hand)

What Mechanism can be used to efficiently allocate scarce resources in a way that maximizes benefits and minimizes costs.

The Rational Rule

What is the Marginal Principle's Rule of Thumb that will help us maximize our economic surplus?

First, the marginal principle. Ask yourself whether you'd be better off doing a bit more of something or a bit less. Second, apply the cost benefit principle. does the marginal benefit of your decision exceed your marginal cost? Third, the opportunity cost principle. You should focus on the relevant opportunity costs, not just financial out-of-pocket costs. Last, The Interdependence principle. Reevaluate your decision based on the factors around you.

What is the four-step process we need to think about in order to work out a problem

Interdependence

What you need to think about when it comes to the ______ principle 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

The Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors changes, your best choice might change.

Opportunity cost

what kind of costs do we refer to when saying "costs" in economics