ECON 2102 Chapter 1
variables
quantities that are free to assume different values in some range
The only costs that should influence a decision about whether to take an action are ___. Similarly, the only benefits we should consider are ___
> those we can avoid by not taking the action > those that would not occur unless the action were taken
The Incentive Principle:
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. In short, incentives matter.
Scarcity Principle
Although 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.
The Effect of an Increase in the Vertical Intercept:
An increase in the vertical intercept of a straight line produces an upward parallel shift in the line
The Cost-Benefit Principle:
An individual (or a firm or a 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.
The Effect of an Increase in the Charge per Minute:
Because the fixed monthly fee continues to be $4, the vertical intercept of the new plan is the same as that of the original plan. With the new charge per minute of 40 cents, the slope of the billing plan rises from 0.20 to 0.40
Pitfall #3
FAILURE TO THINK AT THE MARGIN When deciding whether to per- form an action, the only costs and benefits that are relevant are those that would result from taking the action. It is important to ignore sunk costs
Pitfall #2
IGNORING IMPLICIT COSTS
Pitfall #1
MEASURING COSTS AND BENEFITS AS PROPORTIONS RATHER THAN ABSOLUTE DOLLAR AMOUNTS
scarcity
There is never enough time, money, or energy to do everything we want to do or have everything we'd like to have.
parameter
a quantity in an equation that is fixed in value, not free to vary
abstract model
a simplified description that captures the essential elements of a situation and allows us to analyze them in a logical way
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
___ are opportunity costs
all costs—both implicit and explicit—are opportunity costs
sunk costs
costs that are beyond recovery at the moment a decision is made, regardless of which option is chosen, and as such are irrelevant to the decision
slope
in a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)
vertical intercept
in a straight line, the value taken by the dependent variable when the independent variable equals zero
equation
is a simple mathematical expression that describes the relationship between two or more variables
positive economic principle
one that predicts how people will behave
normative economic principle
one that says how people should behave
rational
people have well-defined goals and try to fulfill them as best they can
marginal benefit
the benefit of an additional unit of the activity
economic surplus
the benefit of taking an action minus its cost (when benefit - cost is a positive number)
marginal cost
the cost of an additional unit of activity
the method of simultaneous equations
the intersection of Line 1 and Line 2 can be calculated by Line 1 - Line 2 and then solving for X, then plugging that X back in to find Y
next best option refers to ___
the most valuable alternative option
Economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society.
average cost
the total cost of undertaking n units of an activity divided by n
opportunity cost
the value of what you must sacrifice to take an action
microeconomics
to describe the study of individual choices and of group behavior in individual markets.
