Chapter 1 – Four Core Principles of Economics & Key Concepts

Vocabulary flashcards covering the core economic principles, decision-making tools, and related concepts introduced in Chapter 1.

Economics

The study of how people make choices under constraints; a systematic way of thinking about trade-offs.

Cost-Benefit Principle

Decision rule that says pursue a choice only if its benefits are at least as great as its costs after evaluating the full set of each.

Willingness to Pay

The maximum amount you would sacrifice to obtain a benefit (or avoid a cost); used to translate non-financial factors into dollars.

Economic Surplus

Total benefits minus total costs generated by a decision; what good decision-making seeks to maximize.

Framing Effect

A bias in which the way choices are presented alters decisions even when underlying costs and benefits are identical.

Opportunity Cost

The value of the next best alternative forgone when you choose one option over another.

Scarcity

The fundamental condition of limited resources that forces individuals and societies to make trade-offs.

Trade-off

The sacrifice of one benefit or resource to gain another because of scarcity.

Sunk Cost

An irrecoverable expense that should be ignored in current and future decision making.

Production Possibilities Frontier (PPF)

A curve showing all attainable combinations of two outputs that can be produced with given resources; illustrates opportunity cost and efficiency.

Marginal Principle

Guideline that quantity decisions should be broken into ‘one more?’ increments, comparing marginal benefits to marginal costs.

Marginal Benefit

The extra gain received from consuming or producing one additional unit of a good or activity.

Marginal Cost

The extra expense incurred from consuming or producing one additional unit of a good or activity.

Diminishing Marginal Benefit

The tendency for each additional unit of consumption to add less utility than the previous unit.

Rational Rule

Instruction to keep doing an activity until marginal benefits equal marginal costs, thereby maximizing economic surplus.

Utility

A measure of satisfaction or happiness derived from consuming a good or service.

Cardinal Utility

The (theoretical) notion that utility can be measured with precise numerical values.

Ordinal Utility

The realistic concept that utility is expressed only through ranking preferences rather than exact numbers.

Interdependence Principle

Recognition that your best choice depends on your other choices, others’ choices, events in other markets, and expectations about the future.