Core Principles of Economics - C1

what do most people think economics is about

Money, stock markets, Business, and Government policy analysis

economics

the study of people “in the ordinary business of life.”

the four core principles of economics

1. The Cost-Benefit Principle

2. The Opportunity Cost Principle

3. The Marginal Principle

4. The Interdependence Principle

Cost-Benefit Principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and only pursue those whose benefits are at least as large as their costs.

How is cost-benefit evaluated?

• Evaluate the full set of costs and benefits associated with that choice.

• Pursue that choice only if benefits are at least as great as the costs

• Convert costs and benefits into dollars by evaluating your willingness to pay

willingness to pay

The maximum amount a buyer would be willing to pay for something. To convert costs or benefits into their monetary equivalent, ask yourself: “What is the most I am willing to pay to get this benefit (or avoid that cost)?”

economic surplus

The total benefits minus total costs flowing from a decision. It measures how much a decision has improved your well-being.

Opportunity Cost

The true cost of something is the next best alternative you have to give up to get it

Sunk Cost

A cost that has been incurred and cannot be reversed. A sunk cost exists in whatever choice you make, and hence it is

not an opportunity cost

Marginal Principle

Decisions about quantity should be made incrementally (one unit at a time)

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, and expectations about the future. When any of these factors changes, your best choice might change.

Framing Effect

When a decision is affected by how a choice is described or framed

Scarcity

Resources are limited; therefore, any resources you spend pursuing one activity leaves fewer resources to pursue other

Sunk Cost

A cost that has been incurred and cannot be reversed. A sunk cost exists in whatever choice you make, and hence it is not an opportunity cost

Production Possibilities Frontier (PPF)

Show the different sets of output that are attainable with your scarce resources

• illustrates the trade-offs you confront when deciding how to allocate your scarce resources (like your time).