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15 Cards in this Set

  • Front
  • Back
Scarcity Principle
- resources are finite, but needs and wants are infinite.
- satisfying all wants and needs is impossible.
Cost-Benefit Principle
- people will only take an action if the EXTRA BENEFITS outweigh the EXTRA COSTS (includes explicit and opportunity costs).
Rational Person
- understands the SCARCITY PRINCIPLE; therefore, they follow the COST-BENEFIT PRINCIPLE
Economic Surplus
Marginal Benefits - Marginal Costs
- related to cost-benefit principle: only take action if economic surplus is positive
Opportunity Cost
- the benefit of the next best alternative which now must be sacrificed
Models
- Simplified version of reality
- Captures IMPORTANT details, but leaves out MINOR details
Decision-making pitfalls with the INCENTIVE PRINCIPLE
1.) Measuring costs and benefits as proportions rather than absolutes (ex: 10% savings rather than $20 savings)
2.) Ignoring OPPORTUNITY COSTS
3.) Including SUNK COSTS
4.) Failure to distinguish between average and marginal measures
sunk costs
- costs that cannot be recovered
ex: nonrefundable, nontransferable ticket to a show is SUNK
marginal costs
- the change in TOTAL COSTS of an activity resulting from an increase in one unit
marginal benefits
- the change in TOTAL BENEFITS of an activity resulting from an increase in one unit
average costs
total cost/# of units
average benefits
total benefits/# of units
incentive principle
- people are more likely to partake in an action if the benefits rise and less likely if the costs rise
normative statement
- a statement about how people SHOULD behave
- politicians deal with normative statements
ex: we should not decrease inflation because poor people are suffering
- states an opinion about what we should do
positive statement
- a statement about how people WILL behave
- economists deal with positive statements
ex: decreasing inflation will increase unemployment
- just states facts about what any action would result in