Micro Economics Chapter 1

Front 1

Scarcity Principle (No-Free-Lunch Principle)

Back 1

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.

Front 2

Cost-Benefit Principle

Back 2

An individual (or a firm, or a society) should take an action if, and only if, the extra benefits from taking that action are at least as great as the extra cost.

The benefit of an action is defined as the largest money amount the person would be willing to pay in order to take the action.

The cost of an action is defined as the money value of everything the person must give up in order to take the action.

Front 3

Economics

Back 3

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

Front 4

Rational person

Back 4

Someone with well-defined goals, who fulfill those goals as the best she can.

Front 5

Economic surplus

Back 5

The economic surplus from taking any action is the benefit of taking that action minus its costs.

Front 6

Opportunity cost

Back 6

The opportunity cost of an activity is the value of the next best alternative that must be forgone in order to undertake the activity.

Front 7

Sunk cost

Back 7

A cost that is beyond recovery at the moment a decision must be made.

Front 8

Marginal cost

Back 8

The increase in total cost that results from carrying out one additional unit of an activity.

Front 9

Marginal benefit

Back 9

The increase in total benefit that results from carrying out one additional unit of an activity.

Front 10

Average cost

Back 10

The total cost of undertaking n units of an activity divided by n.

Front 11

Average benefit

Back 11

The total benefit of undertaking n units of an activity divided by n.

Front 12

Four important decision pitfalls

Back 12

1. The pitfall of measuring costs or benefits proportionally

2. The pitfall of ignoring opportunity costs.

3. The pitfall of not ignoring sunk costs.

4. The pitfall of using average instead of marginal costs and benefits.

Front 13

Microeconomics

Back 13

The study of individual choice under scarcity, and its implications for the behavior of prices and quantities in individual markets.

Front 14

Macroeconomics

Back 14

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

Front 15

Positive economics

Back 15

Consists in the conclusions of economics that are independent of the ethical value system of the economist.

Front 16

Normative economics

Back 16

Consistis in statements in economics that reflect or are based on the ethical value system of the economist, simplicity, explicitly of by omission.

Front 17

Equation

Back 17

A mathematical expression that describes the relationship between two or more variables.

Front 18

Variable

Back 18

A quantity that is free to take a range of different values.

Front 19

Dependent variable

Back 19

A variable in an equation whose value determines the value taken by another variable in the equation.

Front 20

Independent variable

Back 20

A variable in an equation whose value determines the value taken by another variable in the equation.

Front 21

Constant (or parameter)

Back 21

A quantity that is fixed in value.

Front 22

Vertical intercept

Back 22

In a straight line, the value taken by the dependent variable when the independent variable equals zero.

Front 23

Slope

Back 23

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).

Front 24

Differentiation

Back 24

Finding the slope or a rate of change of a function using algebra rather than geometry.