Chapter 1 - The Four Principles of Microeconomics

What do economists use to analyze choices?

the four core principles

What are the four core principles of the economic approach?

Cost-benefit principle, Opportunity cost principle, Marginal principle, interdependence principle

Incentives

rewards or penalties associated with a particular decision

Bob is late to work for the third time this week. However, he decides to drive the speed limit because of the law and his fear of police. His decision to drive the speed limit due to the law is an example of?

incentive

Cost-benefit principle

Costs and benefits are the incentives that shape decisions

Willingness to pay

converts nonfinancial costs or benefits into their monetary equivalent

Economic Surplus equation

total benefits - total costs

What does economic surplus measure?

how much a decision has improved your well-being

Beth values a granola bar at $3. She pay $2 to get it. What is the economic surplus?

$1 (total benefits - total costs)

Framing effect

when a decision is affected by how a choice is described

Rebecca has two choices for tomorrow night. She can go to the moves for a benefit of $30 and a cost of $20. Or she can go bowling for a benefit of $40 and a cost of $35. Which activity will she choose and why?

Movies, they economic surplus gained by seeing the movie is greater than the economics surplus gained from bowling

When using cost-benefit analysis, which of the following must you do?

consider the financial and non-financial aspects

If the benefit of an item is equal to the cost. What should one do, according to the cost-benefit analysis?

BUY IT!