ECON201 Chapter 1: The Four Core Principles of Economics

Vocabulary flashcards covering the key terms, definitions, and concepts of the Four Core Principles of Economics: Cost-Benefit, Opportunity Cost, Marginal, and Interdependence.

Economics

The study of choices, serving as a lens and toolkit through which to examine and understand your decisions and the decisions of others.

Cost-benefit principle

The principle that costs and benefits are the incentives that shape decisions. Before making a decision, evaluate the full set of costs and benefits associated with that choice, and pursue that choice only if benefits are at least as great as the costs.

Willingness to pay

The monetary equivalent used to convert nonfinancial costs or benefits, determined by asking: "What is the most I am willing to pay to get this benefit (or avoid that cost)?"

Economic surplus

The total benefits minus the total costs flowing from a decision ($\text{Economic Surplus} = \text{Total Benefits} - \text{Total Costs}$), measuring how much a decision has improved your well-being.

Framing effect

When a decision is affected by how a choice is described or framed rather than purely by its underlying costs and benefits.

Opportunity cost

The true cost of something, defined as the next best alternative you have to give up to get it.

Scarcity

The condition in which resources are limited, meaning that any resources spent pursuing one activity leaves fewer resources to pursue others.

Sunk cost

A cost that has been incurred and cannot be reversed. It exists in whatever choice you make, is irrelevant to current decisions, and is not an opportunity cost.

Marginal principle

The principle stating that decisions about quantities are best made incrementally by breaking "how many" questions into a series of smaller, or marginal, decisions weighing marginal benefits and marginal costs.

Marginal benefit

The extra benefit received from one extra unit (such as of goods purchased or hours studied).

Marginal cost

The extra cost incurred from one extra unit.

Iterative marginal decision framework

The systematic process of breaking a "how much to buy?" question into "Should I buy one more?" and applying the cost-benefit rule: if $\text{Marginal Benefit} \ge \text{Marginal Cost}$, buy one more and iterate; if not, stop.

Rational Rule

The rule stating that if something is worth doing, you should keep doing it until your marginal benefits equal your marginal costs ($\text{Marginal Benefit} = \text{Marginal Cost}$), which maximizes economic surplus.

Interdependence principle

The core principle stating that your best choice depends on: (1) your other choices, (2) the choices others make, (3) developments in other markets, and (4) expectations about the future.

Dependence between each of your individual choices

The dimension of interdependence where your own choices are connected because you have limited resources (such as limited income, limited time, or limited production capacity).

Dependence between economic actors

The dimension of interdependence where the choices made by other economic actors (people, businesses, governments) shape and restrict the choices available to you.

Dependence between markets

The dimension of interdependence where changes in prices and opportunities in one market affect the choices you make in other markets.

Dependence through time

The dimension of interdependence where decisions made today shape future opportunities and decisions, and expectations about future market conditions affect current actions.