Four Core Principles of Economics

Flashcards for reviewing core economics principles.

What four principles provide a systematic framework for rational economic choices?

Cost-benefit, opportunity cost, marginal, and interdependence principles.

What is the Cost-Benefit Principle?

A rational decision is based on incentives and responds to costs and benefits; pursue a choice if benefits are greater than the costs.

What does economic surplus measure?

How much a decision improves your well-being; calculated as total benefits minus total costs.

What is a framing effect?

When a decision is affected by how a choice is described or framed, potentially leading to irrational decisions.

What is the Opportunity Cost Principle?

The true cost of something is the cost of the next best alternative that must be given up to obtain it.

What is included in the opportunity cost of attending university?

Out-of-pocket costs like tuition and non-out-of-pocket financial costs like forgone salary.

What is a sunk cost?

A cost that has already been incurred and cannot be recovered; it should be ignored in rational decision-making.

What does the Production Possibilities Frontier (PPF) illustrate?

The trade-offs you confront when deciding how to allocate your scarce resources.

What is the Marginal Principle?

Rational decisions involve breaking 'how many' questions into a series of marginal decisions, weighing marginal benefits and costs.

How do you maximize economic surplus according to the marginal principle?

Keep doing something as long as the marginal benefits equal or exceed the marginal costs.

What is the Interdependence Principle?

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future.

Give an example of dependence between individual choices.

Limited income impacts how much can be spent on different items. Limited time devoted to studying one subject affects the time available to study another.

Give an example of dependence between people

If your friend hire for an internship, then your chances of getting hired at that same company have decreased.

Give an example of dependence between markets

Increased student immigration levels, may make student housing more expensive, discouraging living away from home.

What is the rational decision rule?

When faced with a choice, evaluate the full set of costs and benefits.

If you are considering buying snack bar on campus, and you are willing to pay $4 for it, but it costs $5, should you buy it?

No, because your willingness to pay ($4) is less than the cost of snack bar ($5).

What is the formula to calculate Economic Surplus?

Economic Surplus = total benefits – total costs.

Limited _ makes tradeoffs inescapable.

Scarcity

Can only financial costs be an opportunity cost?

No, other non-financial costs such as mental exertion can factor into opportunity cost as well.

What types of decisions should use marginal analysis?

How many apples to buy or how many classes to take this semester.