CH 1: Macroeconomics

Comprehensive vocabulary flashcards covering introductory macroeconomic principles, cost-benefit analysis, decision-making pitfalls, formulas, and marginal analysis based on lecture notes.

Economics

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

The Scarcity Principle

The principle that although we have boundless needs and wants, the resources available to us are limited; therefore, having more of one good thing typically means having less of another.

iff

An abbreviation for 'if and only if'.

Benefit Principal

The principle stating that an individual, firm, or society should take an action if and only if the extra benefit is at least as great as the extra cost ($\text{Benefit} \times \text{Cost}$ baseline, where $\text{Benefit} \bm{\text{ > }} \text{Cost}$ or $\text{Extra Benefit} \bm{\text{ ≥ }} \text{Extra Cost}$).

Opportunity Cost

The value of what must be forgone in order to pursue an activity.

Cost (for pursuing an activity for somebody else)

The lowest dollar value you are willing to accept to pursue an activity for somebody else.

Benefit

The highest dollar value you are willing to pay to pursue an activity or purchase an item.

Economic Surplus

The benefit of taking an action minus its cost, calculated using the formula $\text{Economic Surplus} = \text{Benefit} - \text{Cost}$.

Cost-Benefit Principle

The rule stating to take an action if and only if $\text{Extra Benefit} \bm{\text{ ≥ }} \text{Extra Cost}$.

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best as they can by maximizing economic surplus.

The 3 Decision Pitfalls

Errors that humans make that lead down the path of not applying the Cost-Benefit rule properly.

First Decision Pitfall

Thinking about costs and benefits as proportions rather than in absolute dollar terms.

Implicit Costs

Costs that are non-explicit and sometimes used interchangeably with opportunity cost; ignoring them is the second decision pitfall.

Explicit Cost

The actual money amount that you pay for an activity or item.

Third Decision Pitfall

Failure to 'Think at the Margin'.

Sunk Cost

A cost that is beyond recovery at the time a decision must be made and should not influence future decisions.

Marginal Cost

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

Marginal Benefit

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

Average Cost

The total cost of carrying out $n$ units of an activity, divided by $n$: $\text{Average Cost} = \frac{\text{total cost of carrying out } n \text{ units}}{n}$.

Average Benefit

The total benefit of carrying out $n$ units of an activity divided by $n$: $\text{Average Benefit} = \frac{\text{total benefit of carrying out } n \text{ units}}{n}$.

Marginal Analysis Decision Rule

Decisions to pursue activities should not be based on average cost, but rather based on whether $\text{Marginal Benefit} \bm{\text{ ≥ }} \text{Marginal Cost}$.