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15 Cards in this Set
- Front
- Back
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Scarcity Principle
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- resources are finite, but needs and wants are infinite.
- satisfying all wants and needs is impossible. |
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Cost-Benefit Principle
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- people will only take an action if the EXTRA BENEFITS outweigh the EXTRA COSTS (includes explicit and opportunity costs).
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Rational Person
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- understands the SCARCITY PRINCIPLE; therefore, they follow the COST-BENEFIT PRINCIPLE
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Economic Surplus
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Marginal Benefits - Marginal Costs
- related to cost-benefit principle: only take action if economic surplus is positive |
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Opportunity Cost
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- the benefit of the next best alternative which now must be sacrificed
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Models
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- Simplified version of reality
- Captures IMPORTANT details, but leaves out MINOR details |
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Decision-making pitfalls with the INCENTIVE PRINCIPLE
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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 |
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sunk costs
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- costs that cannot be recovered
ex: nonrefundable, nontransferable ticket to a show is SUNK |
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marginal costs
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- the change in TOTAL COSTS of an activity resulting from an increase in one unit
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marginal benefits
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- the change in TOTAL BENEFITS of an activity resulting from an increase in one unit
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average costs
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total cost/# of units
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average benefits
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total benefits/# of units
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incentive principle
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- people are more likely to partake in an action if the benefits rise and less likely if the costs rise
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normative statement
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- 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 |
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positive statement
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- 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 |
