Mirco Economics Chapter 6

Utility

A measure of your satisfaction or happiness

Water- Diamond Paradox

Goods with inelastic demand are cheap. Goods with elastic demand are expensive

A student says, "Water is more useful than diamonds, so it should be more expensive." Using the Water–Diamond Paradox, explain why this statement is incorrect.

The statement is incorrect because price is based on marginal utility, not total utility. Although water is more useful overall, it is abundant, so its marginal utility is low, leading to a low price. Diamonds, on the other hand, are scarce, so their marginal utility is high, which results in a high price.

Who is the founder of economics?

Adam Smith

Total Utility

The total amount of satisfaction you get from doing something. Consuming something.

Marginal Utility

The additional satisfaction that you can from each additional unity 

Law of Diminishing Marginal Utility

The more you do something, the less and less additional satisfaction you get 

Behavioral economics

The study of how people actually make decisions, including how emotions, biases, and psychology affect their choices.

Compartmentalizing

Treating dollars differently based on their source

The Endowment Effect

We value things more just because we own them

Sunk Costs

Costs that have already been borne and can never be recovered 

Framing Bias

When individuals are steered towards a particular choice based on how choices are portrayed. 

Overconfidence 

Confidence is good. Too much confidence is not, it might have the opposite effect 

Altruism

Engaging in charitable acts. Donating, Volunteering

Sunk Cost Fallacy

The phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that it would be more beneficial

Budget Line Equation

(P_x x Q_x) + (P_y x Q_y)

If MU > P, then…

buy it

If MU < P, then

do not buy it