Microeconomics 102 - CH 1. Thinking Like an Economist

Opportunity Cost - EXAMPLE

If seeing a movie requires not only that you buy a $10 ticket, but also that you give up a $20 babysitting job that you would have been willing to do for free, then the opportunity cost of seeing the film is $30.

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

Economic Surplus

The benefit of taking an action minus its cost.

Trade-off

The idea that having more of one thing usually means having less of another.

Remember:

The only costs that should influence a decision about whether to take an action are those we can avoid by not taking the action. Similarly, the only benefits we should consider are those that would not occur unless the action were taken.

average cost

The total cost divided by the number of units

Opportunity Cost

The value of what must be sacrificed to undertake an activity.

Remember:

We should only focus on the marginal cost and marginal benefit when making decisions.

Remember:

We should only pursue activities if the marginal benefit is greater than or equal to the marginal cost.

Rational

When people have well-defined goals and try to fulfill them as best as they can.

sunk cost

a cost that has already been paid and cannot be recovered. (It is best to ignore them when making decisions)

When assessing the costs and benefits associated with taking an action, it is generally best to consider costs and benefits as...

absolute dollar amounts rather than proportions

Trade-off

an alternative that we sacrifice when we make a decision

the fact that people do not always consciously weigh costs and benefits when making decisions...

doesn't mean that economic models aren't useful for predicting behavior

The Cost-Benefit Principle

is not always a positive, or descriptive, economic principle.

Economics

is the study of how people make choices under conditions of scarcity and of the results of those choices for society

normative economic principle

says how people should behave

rational person

someone with well-defined goals who tries to fulfill those goals as best as they can.

The three core ideas:

the Scarcity Principle, the Cost-Benefit Principle, and the Incentive Principle.

marginal benefit

the increase in total benefit from one additional unit of an activity.

marginal cost

the increase in total cost from one additional unit of an activity.

implicit costs

the opportunity costs of the resources supplied by the firm's owners

Whether to pursue an activity?

the question is not whether to pursue an activity but rather how many units of it to pursue. (In these cases, the rational person pursues addition units as long as the marginal benefit of the activity exceeds its marginal cost{the cost of pursuing an additional unit of it})

Microeconomics

the study of individual choices and of group behavior in individual markets.

Macroeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance.

Average cost

the total cost divided by the number of units.

average benefit

total benefit divided by the number of units

Core Principle means:

Scarcity.

The Cost-Benefit Principle is a ________ economic principle, while the Incentive Principle is a ________ economic principle

normative, positive

positive economic principle

one that predicts how people will behave

"Economic Naturalist"

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

3 Common Pitfalls that plague decision makers in all walks of life:

1) a tendency to treat small proportional changes as insignificant, 2) a tendency to ignore implicit costs, 3) a tendency to fail to think at the margin (ex> not ignoring sunk costs)

Incentive Principle (positive economic 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.

The Scarcity Principle (No-Free-Lunch Principle)

Although we have boundless needs and wants, the resources available to us are limited.

Cost-Benefit Principle

An individual should take an action if, and only if, the benefit of that action is at least as great as its cost.