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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
