Chapter 1 Key Vocabulary: Opportunity Cost and Interdependence

Vocabulary flashcards covering key terms from Chapter 1 notes on opportunity cost, scarcity, trade-offs, and interdependence.

Opportunity cost

The value of the next-best alternative given up when making a choice; reflects the trade-off and may include nonmonetary costs.

Sunk cost

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

Scarcity

The condition of having limited resources relative to wants, which creates trade-offs in choices.

Trade-off

A situation where choosing more of one thing requires giving up some of another.

Cost-benefit principle

The idea that decisions should be made by comparing benefits and costs to determine if benefits exceed costs.

Marginal principle

Decisions about quantities are made incrementally; analyze the additional (marginal) benefit and cost of one more unit.

Marginal benefit

The extra benefit received from one additional unit of a good or activity.

Marginal cost

The extra cost incurred from one additional unit of a good or activity.

Production Possibilities Frontier (PPF)

A curve showing the maximum feasible outputs given resources and technology; illustrates trade-offs and efficiency (points on the frontier are efficient; inside = inefficient; outside = unattainable).

Interdependence principle

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

Economic surplus

Total benefits minus total costs; is maximized when marginal benefit equals marginal cost.

Rational rule

Continue an activity until marginal benefit equals marginal cost; stop when MB = MC to maximize surplus.

Forgone wages (forgone income)

The wages you give up by not working to pursue schooling or a different option.

Forgone interest

The interest you forgo by not keeping funds invested elsewhere when pursuing a new venture or education.

Time costs (non-financial costs)

The value of time and effort spent, counted as part of opportunity costs.

Willingness to pay

The maximum amount a consumer is willing to pay for a good or service.

Framing effect

A cognitive bias where the way a choice is framed influences decision outcomes.

Next-best alternative

The best alternative that is given up when choosing an option; the reference point for opportunity cost.

Efficiency on the PPF

Allocations on the PPF use all available resources; any point on the frontier is efficient.

Intertemporal decision

Decisions today that affect future opportunities and costs; e.g., buy now vs later.

Dependence between choices

Decisions are connected; spending on one option affects availability of resources for others.

Dependence between markets

Changes in one market can affect prices and opportunities in other markets.