Chapter 1 - Thinking like an economist

Economic surplus

: benefit of taking an action minus its cost.

Rational person

: someone with well- defined goals who tries to fulfill those goals as best he /she can.

Economic surplus

: benefit of taking an action minus its cost.

Rational person

: someone with well- defined goals who tries to fulfill those goals as best he /she can.

Macroeconomics

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

Microeconomics

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

Normative economic principle

says how people should behave.

Absolute dollar amounts

, not proportions, should be employed to measure costs and benefits.

Incentive principle

: person (or a firm /society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises.

Decision makers

often have ready information about the total cost and benefit of an activity, and from these it's simple to compute the activity's average cost and benefit.

Scarcity principle

= no- free- lunch principle: although we have boundless needs and wants, the resources available to us are limited.

Positive economic principle

predicts how people will behave.

Marginal benefit

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

Average benefit

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

Average cost

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

Opportunity cost

: value of what must be forgone to undertake an activity.

Economics

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

Scarcity principle = no-free-lunch principle

although we have boundless needs and wants, the resources available to us are limited

Cost-benefit principle

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

Rational person

someone with well-defined goals who tries to fulfill those goals as best he/she can

Economic surplus

benefit of taking an action minus its cost

Opportunity cost

value of what must be forgone to undertake an activity

Sunk cost

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

Marginal cost

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

Marginal benefit

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

Average cost

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

Average benefit

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

Incentive principle

person (or a firm/society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises

Microeconomics

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

Macroeconomics

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