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Cost-Benefit Principle
Costs and benefits are the incentives that shape decisions.
Willingness to Pay
In order to convert nonfinancial costs or benefits into their monetary equivalent, ask yourself: “what is the most I am willing to pay to get this benefit?”
Economic Surplus
The total benefits minus the total costs flowing from a decision. It measures how much a decision has improved your well-being.
Framing Effect
When a decision is affected by how a choice is described or framed.
Example: when a price tag shows original price and sale price
Opportunity Cost
The true cost of something is the next best alternative you have to give up to get it. (trade-offs)
Scarcity
Resources are limited. Any resources you spend pursuing one activity leaves fewer resources to pursue others.
limited money, time, attention, willpower, and production resources.
Sunk Cost
A cost that has bee incurred and cannot be reversed. A sunk cost exists in whatever choice you make, ad hence it is not an opportunity cost.
good decision makers ignore sunk costs
Production Possibilities Frontier (PPF)
Shows the different sets of output that are attainable with your scarce resources.
illustrates trade-offs
Marginal Principle
Decisions about quantities are best made incrementally.
Break “how many” questions into a series of smaller marginal decisions weighing the marginal benefits and costs.
instead of “How many workers should I hire?”
“Should I hire one more worker?”
Marginal Benefit
The extra benefit from one extra unit.
Marginal Cost
The extra cost from one extra unit.
Rational Rule
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
Interdependence Principle
Your best choice depends on:
your other choices
the choices others make
developments in other markets
expectations about the future
you are part of a larger network.
Dependence Between Each of Your Individual Choices
Your own choices are all connected because you have limited income.
Dependence Between Economic Actors
The choices made by other economic actors (people, businesses, governments, etc) shape the choices available to you.
Dependence Between Markets
Changes in prices and opportunities in one market affect the choices you might make in other markets.
Dependence Through Time
Is it better to act today or tomorrow?
Decisions today shape future opportunities and decisions.
