Economic Principles and Marginal Analysis Practice

A set of vocabulary flashcards covering the economic concepts of marginal analysis, sunk costs, and decision-making frameworks based on the lecture examples.

Expected Additional Benefit (EAB)

The additional gain or revenue expected from taking a specific action, such as the extra income earned from providing an additional service like engine detailing.

Expected Additional Cost (EAC)

Also referred to as marginal cost, it is the additional expense incurred when making a choice or performing an additional unit of activity.

Three-strike laws

A legal framework that can lead to increased murder rates because the relative expected additional cost of murder becomes lower for a third offense, while the expected additional benefit of killing a witness increases.

Marginal Benefit calculation

The difference between a total price and a base price; for example, if a total service costs $90$ and a basic service costs $75$, the marginal benefit is $15$ ($90 - 75 = 15$).

Sunk cost

A cost that has already been spent, is not recoverable, and should be ignored when making decisions about the future.

Sunk cost fallacy

A common decision-making error where individuals allow past investments of time, money, or effort that cannot be recovered to influence their current choices instead of focusing on future benefits and costs.

The Economic Way of Thinking

A framework that uses the expected additional benefit and expected additional cost ($EAB$ vs. $EAC$) inequality to predict outcomes and understand the underlying incentives of human behavior.

Marginal Decision Rule (Business)

A principle stating that a service should not be offered if the marginal benefit (e.g., $15$) is strictly lower than the marginal cost (e.g., $20$), even if the total profit remains positive.

Deshaun's Detailing Service Example

A scenario used to illustrate that offering an additional service is irrational if it costs more ($20$) than it generates in additional revenue ($15$), as it results in lower total profits ($30$ vs. $35$).

Pookie's Pinball Palace Example

A scenario demonstrating sunk costs where a restoration should not be completed if the additional cost ($1,100$) results in a lower net gain ($900$) compared to selling the machine as-is for a higher amount ($1,000$).