Week 1 lecture Notes

Cost Benefit Principle

The incentives driving decisions - evaluate the full set of costs/benefits and pursue if benefits are greater than the costs.

Willingness to pay

convert non-financial costs or benefits with monetary equivalent. Note this is what you are willing to pay not want to pay.

Framing effect

when a decision is altered by how a choice is framed

Opportunity cost

The true cost of something is the cost of the next best alternative you give up

sunk cost

A cost incurred that cannot be reversed. It exists no matter the cost and is therefore not an opportunity cost.

Scarcity

resources are limited, therefore resources spent pursuing one activity leaves less resources to pursue others

Marginal principle

Decisions about quantities are best made incrementally. Break ‘how many’ into ‘one more’ and weight if marginal benefit exceeds marginal costs.

economic surplus

the total benefits minus total cost - measures how much a decision improves your wellbeing.

Marginal Benefit

the extra benefit from one unit

marginal cost

the extra cost from one extra unit

Rational Rule

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

Interdependence Principle

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