ECON 1002: Decision Making, Costs, and Market Equilibrium

Flashcards testing core microeconomic principles including individual choice, opportunity cost, marginal decision rules, demand, supply, market equilibrium, and economic surplus based on lecture slides.

Scarcity

The condition in which available resources—such as time, attention, money, and physical materials—are limited, making choices necessary for individuals, firms, and governments.

Preferences

The internal values and rankings that a decision-maker uses to compare and evaluate different outcomes.

Beliefs

The expectations or thoughts a decision-maker holds regarding what outcome will occur following each potential action.

Information

The evidence and data available to a chooser at the time their beliefs are formed.

Constraints

The practical, physical, financial, or legal boundaries that define which actions are feasible for a decision-maker.

Rational Choice

The economic benchmark in which a chooser selects the feasible action expected to yield the best outcome given their preferences, beliefs, information, and constraints.

Explicit Cost

A cost that requires a direct payment or financial transaction when an action is selected.

Implicit Cost

A non-monetary cost measuring the value of forgone opportunities or resources already owned, such as time, effort, inconvenience, and risk.

Opportunity Cost

The total value of the best forgone alternative when making a choice, calculated as the sum of explicit and implicit costs ($\text{Opportunity Cost} = \text{Explicit Cost} + \text{Implicit Cost}$).

Economic Surplus

The net benefit received from an action, calculated as total benefit minus total cost or total opportunity cost ($\text{Economic Surplus} = \text{Total Benefit} - \text{Total Cost}$).

Phone Economic Surplus Rule

The rule stating that when choosing between discrete mutually exclusive options (e.g., Buy Nothing, Phone A, or Phone B), a chooser should calculate each option's surplus ($\text{Benefit} - \text{Cost}$) and select the feasible alternative with the greatest surplus.

Sunk Cost

A cost incurred in the past that cannot be recovered and is unchanged by current or future choices; sunk costs should be ignored when making decisions.

Total Cost

The combined cost required to produce or consume a given number of units.

Average Cost

The total cost divided by the total number of units produced or consumed ($\text{Average Cost} = \frac{\text{Total Cost}}{\text{Quantity}}$)

Marginal Cost (MC)

The increase in total cost that results from producing or purchasing one additional unit.

Marginal Benefit (MB)

The additional benefit or maximum willingness to pay derived from consuming or producing one extra unit.

Marginal Decision Rule

The principle stating that an activity should be expanded as long as its marginal benefit is greater than or equal to its marginal cost ($\text{MB} \geq \text{MC}$), stopping before the unit where $\text{MC} > \text{MB}$.

SpaceX Launch Cost Schedule

A decision table tracking total, average, and marginal costs per launch to illustrate how marginal analysis guides the optimal number of rocket launches based on marginal benefit.

Law of Diminishing Marginal Utility

The economic principle that as a person consumes additional units of a good, each additional unit provides less extra satisfaction or utility than the previous one.

Horizontal Interpretation of Demand

Reading a demand curve by starting at a specific price to determine the total quantity buyers will purchase at that price.

Vertical Interpretation of Demand

Reading a demand curve by starting at a specific quantity to determine the maximum price the marginal buyer is willing to pay for that unit.

Market Demand

The total quantity demanded across all individual buyers in a market at each given price, formed by horizontally summing individual demand curves.

Low-Hanging Fruit Principle

The principle explaining that producers utilize the easiest or least costly resources first, causing marginal opportunity cost to rise as production expands.

Seller's Reservation Price

The lowest price a seller is willing to accept to offer an additional unit of a good, equal to its marginal cost.

Market Equilibrium

The state in which the market price causes planned quantity demanded to equal planned quantity supplied, leaving no tendency for price or quantity to change.

Market Equilibrium Graph

A graphical representation showing the intersection point of supply ($S$) and demand ($D$) curves, identifying the equilibrium price ($P^*$) and equilibrium quantity ($Q^*$).

Shortage (Excess Demand)

A condition where quantity demanded exceeds quantity supplied because the prevailing price is below the market equilibrium price.

Surplus (Excess Supply)

A condition where quantity supplied exceeds quantity demanded because the prevailing price is above the market equilibrium price.

Consumer Surplus

The economic gain accrued by buyers, calculated as the buyer's maximum willingness to pay minus the price actually paid ($\text{Consumer Surplus} = \text{Willingness to Pay} - \text{Price}$).

Producer Surplus

The economic gain accrued by sellers, calculated as the market price received minus the seller's marginal opportunity cost ($\text{Producer Surplus} = \text{Price} - \text{Marginal Cost}$).

Incentive Principle

The general principle stating that actions are more likely to be taken if expected benefits rise, and less likely to be taken if expected costs rise.

Invisible Hand Theory

Adam Smith's 1776 doctrine stating that individuals pursuing their own private self-interest in competitive markets frequently benefit society as a whole.