econ

cost-benefit principle.

We consider the costs and benefits of a choice

opportunity cost principle.

or what? the true cost of something is the most valuable alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

ex. Should you invest in the stock market or put your money in savings?

marginal principle

We think at the margin, always asking whether a bit more or a bit less of something would be an improvement.

interdependence principle.

And we are particularly attuned to understanding how different decisions depend on each other.

cost-benefit principle

says that costs and benefits are the incentives that shape decisions. This principle suggests that before you make any decision, you should:

Evaluate the full set of costs and benefits associated with that choice.

Pursue that choice, only if the benefits are at least as large as the costs.

willingness to pay.

the maximum amount that a buyer will pay for a good

economic surplus,

The difference between the benefits you enjoy and the costs you incur

framing effect.

small differences in how alternatives are described, or framed, can lead people to make different choices.

The opportunity cost of something

The opportunity cost of something is the next best alternative you have to give up.

scarcity

Your resources are limited—that is, they're scarce. It's not just that you have limited income, but you also have limited time

sunk costs

When the time, effort, and other costs you put into the project cannot be reversed, they are referred to as

production possibility frontier

is for—it maps out the different sets of output that are attainable with your scarce resources. It illustrates the trade-offs—that is, the opportunity costs—you confront when deciding how best to allocate scarce resources like your time, money, raw inputs, or production capacity.

The marginal principle

is useful for "how many" decisions, but not for "either/or" choices.

marginal principle

says that decisions about quantities are best made incrementally.

marginal benefit

the extra benefit you get from one more worker

marginal cost

the extra cost of that worker is called the

economic surplus

the difference between your total benefits and total costs

Rational Rule

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

interdependence principle,

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

There are four types of interdependencies you'll need to think about:

Dependencies between each of your individual choices

Dependencies between people or businesses in the same market

Dependencies between markets

Dependencies through time

individual demand curve

plots the quantity that he plans to buy at each price.

An individual demand curve

holds other things constant

The individual demand curve

downward-sloping

the price gets lower, the quantity demanded gets larger.

to remeber

Your individual demand curve is a graph summarizing your buying plans, and how they vary with the price.

law of demand.

. This is such a pervasive pattern that economists call the tendency for the quantity demanded to be higher when the price is lower the

demand curve

marginal benefit curve.

diminishing marginal benefit

marginal benefit of each additional item is smaller than the marginal benefit of the previous item.

market demand curve

It plots the total quantity of a good demanded by the market (that is, across all potential buyers), at each price.

Market demand

the sum of the quantity demanded by each person.

market demand step 1

Step one: Survey your customers, asking each person the quantity they will buy at each price.

market demand step 2

Step two: For each price, add up the total quantity demanded by your customers.

To add up demand,

quantity demanded by each individual at each price (and not the price each individual pays at each quantity).

market demand step 3

Scale up the quantities demanded by the survey respondents so that they represent the whole market.

market demand Step four:

Step four: Plot the total quantity demanded by the market at each price, yielding the market demand curve.

A change in price causes a

movement along the demand curve, yielding a change in the quantity demanded. Yes, I know this sounds unwieldy, but it will help keep things straight. Trust me.

shift in the demand curve

When the demand curve itself moves

increase in demand

a rightward shift because at each and every price, the quantity demanded is higher

decrease in demand

A leftward shift the quantity demanded is lower at each and every price.

Six Factors Shifting the Demand Curve

1. income

2. preferences

3. prices of related goods

4. expectations

5. congestion and network effects

6. the type and number of buyers

. . . but not a change in price.

normal good

If your demand for a good increases when your income is higher

demand shifter 1 inferior goods

where demand decreases when income rises.

example of normal good

gas

example of inferior good

college ramen noodles

demand shifter 2

Your preferences.

example of preferences

having baby do u want bus to rest or car to take care of sick baby

fashion cycles, such as the fads that increased demand for Ugg boots and Crocs in the early 2000s,

complementary goods

When the higher price of one good decreases your demand for another good

substitute goods

replace each other

example of complementary goods

cheaper cars lead more people to drive, and this increases the demand for gas, shifting the demand curve to the right

example of substitute goods

If the price of bus tickets doubles, you might start driving to work instead of catching the bus, increasing your demand for gas.

Demand shifter four

Expectations

example of expectations

If you believe that this high price is only temporary, you might put off filling your tank for a few days, decreasing today's demand for gas. Conversely, if you believe gas prices are going to rise further, you should probably fill up right away, increasing today's demand.

Demand shifter five

Congestion and network effects.

network effect

where a product or service becomes more useful to you as more people use it. If a product is more useful, it yields greater marginal benefits, increasing your demand.

Many American college students use Facebook, Instagram, or Snapchat, but in China, WeChat is the most popular social media platform

congestion effect.

By contrast, some products become less valuable when more people use them, and this reverse case is called a

Demand shifter six:

Type and number of buyers.

example of type and number of buyers

baby boom increase demand for baby clothes

If the only thing that's changing is the price,

then you're thinking about a movement along the demand curve

But when other market conditions change

you need to think about shifts in the demand curve.

When the price changes

you are analyzing a movement along the demand curve. When other factors change, the demand curve may shift.

Things that shift the demand curve are

PEPTIC:

Preferences

Expectations

Price of related goods

Type and number of buyers

Income

Congestion and network effects

PEPTIC:

Preferences

Expectations

Price of related goods

Type and number of buyers

Income

Congestion and network effects

individual supply curve

is a graph of the quantity that a business plans to sell at each price; it summarizes a business's selling plans.

An individual supply curve holds

other things constant.

The individual supply curve is

upward-sloping

law of supply

It's an intuitive idea: If you can sell something for a higher price, you'll sell more of it (

perfect competition

which is the special case in which 1) all firms in the market are selling an identical good; and 2) there are many sellers and many buyers, each of whom is small relative to the size of the market. This has important implications for BP's price-setting strategy.

price-takers

which means they take the market price as given and just follow along

variable costs,

vary with the quantity of output you produce. Your marginal costs are your additional variable costs.

fixed costs

don't change when you vary the quantity of output you produce.

marginal product

The extra output you get from an additional unit of input—like hiring one more worker—is called the