Core economic thinking & decision rules

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Last updated 2:46 AM on 4/21/26
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10 Terms

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Scarcity
Resources are limited, so trade-offs are unavoidable.
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Cost-benefit principle
Choose an action when benefits exceed costs (using money as a measuring stick).
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Opportunity cost
The next-best alternative you give up.
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Marginal principle
Decisions should compare additional (marginal) benefits to additional (marginal) costs.
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Marginal benefit (MB) / marginal cost (MC)
The extra benefit / extra cost from one more unit.
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Rational rule (MB = MC)
Do more until marginal benefit equals marginal cost.
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Interdependence
Outcomes depend on other choices, other markets, and expectations.
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Framing effects
Identical options can lead to different choices depending on presentation.
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Sunk costs
Past, irreversible costs that should not affect current decisions.
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PPF (production possibilities frontier)
Attainable output combinations with current resources/technology; shows opportunity cost