Introduction to Economizing and Incentives

Vocabulary terms covering basic economic decision-making principles including marginal analysis, opportunity costs, and consumer psychology.

Expected Additional Benefit (EAB)

The specific additional gain or savings achieved by choosing one alternative over another, such as saving $10$ dollars by driving to a further location.

Expected Additional Cost (EAC)

The sum of all additional costs faced when making a choice, including explicit expenses like gas and parking, and implicit factors like wear and tear on a vehicle.

Decision Rule

The rule that an individual chooses an action as long as the expected additional benefit is higher than or equal to the expected additional cost, expressed as EABext{ (or }MB)>EAC{ (or }MC) .

Opportunity Cost of Time

The value given up of whatever else an individual could have done with the time spent on a specific resource or activity.

Economizing

The process of comparing expected additional costs and expected additional benefits for any given choice to make a decision.

Absolute Terms

Evaluating savings or gains based on the actual dollar amount (e.g., $10$ dollars) rather than the percentage of the original price.

The Percentage Trap

An advertising and psychological trick where consumers mistakenly prioritize high percentage discounts (like $50\%$ off book) over the same absolute savings on higher-priced items (like 1% of a 1000 dollar computer). NOT 1% off

Market Signaling (Pricing)

The concept that a discounted price indicates the market has rejected the original higher price, signaling that the item is no longer worth that higher value.