Studied by 50 peoplecost-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
income
preferences
prices of related goods
expectations
congestion and network effects
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
Note
Flashcard