The Four Core Principles of Economics

A series of vocabulary flashcards covering key concepts from the principles of economics.

Cost-Benefit Principle

A framework stating you should pursue a choice only if the gains are at least as great as the sacrifices (Gains \ge Sacrifices).

Opportunity Cost Principle

The value of the next best alternative you have to give up to get something.

Marginal Principle

The idea that decisions about quantities are best made incrementally by weighing additional gains and additional sacrifices.

Interdependence Principle

The concept that your best choice depends on other choices, the actions of others, developments elsewhere in the economy, and expectations about the future.

Economic Surplus

The difference calculated as Total Benefits - Total Costs, representing the improvement in well-being.

Sunk Cost

An expenditure that has already been incurred and cannot be recovered; good decision makers ignore these when making future choices.

Willingness to Pay

The maximum amount an individual is willing to spend to obtain a gain or avoid an expense.

Framing Effects

Influence on decisions and perceptions caused by the way choices are presented.

Scarcity

The condition where resources are limited, making choices involving sacrifice inescapable.

Production Possibilities Frontier (PPF)

A graph that shows the different sets of output achievable with given resources, illustrating the limits of what can be produced.

Marginal Benefit

The extra gain from producing or consuming 1 additional unit of a good or service.

Marginal Cost

The additional sacrifice required to produce or consume 1 more unit of something.

Rational Rule

A guideline suggesting an activity should be continued until the incremental benefit is equal to the incremental cost (MB = MC).

Someone Else's Shoes Technique

A strategy for predicting behavior by analyzing the unique motivations and sacrifices faced by other people.

Comparative Advantage

The ability to produce a specific item at a lower sacrifice of alternatives than another $1$ producer.

Absolute Advantage

The capacity to generate a higher quantity of output using the same volume of inputs as others.

Gains from Trade

The additional well-being achieved by focusing on tasks with low relative sacrifices and exchanging with others.

Incentives

Factors that motivate an individual to act, often taking the form of rewards or punishments.

Positive Economics

The study of 'what is', focusing on objective descriptions and how parts of the economy function without expressing value judgments.

Normative Economics

The study of 'what ought to be', involving value judgments and recommendations about economic policies.

Specialization

The process of concentrating on a specific task or production of a particular good to achieve greater efficiency.

Productive Efficiency

A state where output is maximized given the available inputs, occurring when an economy is operating on its outermost production boundary.

Allocative Efficiency

A condition where resources are distributed in a way that maximizes total satisfaction, occurring when the price (P) of a product equals the marginal cost (P = MC).

Trade-offs

The necessary sacrifice of 1 thing to obtain another, necessitated by the reality of limited resources.

Market

A system or venue where buyers and sellers interact to exchange goods or services.

Equity

The fair distribution of economic benefits among members of a society.