Econ 101 Terms - Chapter 1: The Four Core Principles of Economics

Cost Benefit Principle

This principle suggests that one should 1) evaluate the full set of benefits and costs for any choice and 2) pursue it if benefits are at least as large as costs.

Economic Surplus

The total benefits minus the total costs from a decision, measuring how much a decision has improved well-being.

How can consumers maximize economic surplus?

By making decisions in accordance with the cost-benefit principle.

Opportunity Cost Principle

The value of the next best alternative that is given up when choosing one option over another.

What are sunk costs?

Costs that have already been incurred and cannot be recovered; not included in opportunity cost.

What does the Marginal Principle focus on?

Making decisions based on small changes and considering the impact of a bit more or a bit less of something.

Interdependence Principle

The idea that markets do not act in isolation and that individual decisions are influenced by the decisions of others.

What question should you ask when considering alternatives according to the Opportunity Cost Principle?

Ask 'Or what?' to evaluate the cost of the next best alternative.

How does scarcity affect economic choices?

Scarcity leads to limited resources and unlimited wants, necessitating choices that imply costs.

What is the relationship between limited resources and unlimited wants?

Limited resources versus unlimited wants leads to the necessity of making choices, which incur costs.

What does it mean to think at the margin?

To consider whether a little more or a little less of something would be an improvement in decision-making.

How do preferences affect economic decisions?

Preferences vary among individuals, influencing their decisions and willingness to pay for different benefits.

What is the primary focus of economics as a study?

The study of the use of scarce resources to meet unlimited wants.

Production Possibilities Frontier (PPF)

Shows the different sets of output that are attainable with scarce resources and illustrates the trade-offs in resource allocation.

Marginal benefit

The benefit derived from one more unit of a good purchased or hours spent studying.

Marginal cost

The extra cost incurred from producing one more unit of a good.

Someone else’s shoes technique

Imagine yourself in someone else’s position in order to understand their objectives and constraints, and forecast the decisions they will make.

Rational Rule

If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.

Willingness to pay

The maximum amount a buyer would be willing to pay for something- to convert costs or benefits into their monetary equivalent, ask “What is the MOST I am willing to pay to get this benefit [or avoid that cost]?”

Framing effect

When a decision is affected by how a choice is described, or framed— you should avoid framing effects altering your own decisions