Chapter 1: Principles of Economics

Microeconomics

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

Economics

The study of how people make choices under conditions of scarcity and the results of those choices

Macroeconomics

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

Opportunity Cost

The value of what must be forgone to undertake an activity

Trade-Offs

They are inevitable and necessary and it is the gain of one thing while loosing another (often related to limited resources)

Cost-Benefit Principle

Used to resolve trade-offs, it says that an individual should take an action, if and only if, the extra benefits from taking the action are at least as great as the extra cost

Thinking in Terms of Scarcity

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

3 Things that Must be Taken Into Account

1. Measuring the costs and benefits as proportions 2. Pay attention to implicit costs 3. Think at the margin

Explicit Costs

A business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability

Sunk Cost

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

Implicit Costs

A cost that is represented by lost opportunity in the use of a company's own resources

Positive Economic Principle

One that predicts how people will behave and they are objective and fact based (Incentive Principle)

Incentive Principle

Say a person is more likely to take an action if its benefit rises, and less likely to take it if its cost rises (Incentives Matter)

Normative Economics Principle

Says how people should behave and they are subjective and value based (Cost-Benefit Principle)

Economic Surplus

The benefit of taking an action minus the cost