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