Unit 3 - chapter 8, 9, 11 need to do 8

microeconomics

Oppurtunity Cost

the true cost or anything is what you must give up to get it

What is principle of either-or decision making

This principle states that when making decisions, one must choose between two alternatives, weighing the opportunity costs of each option to determine the most beneficial choice.

What is explicit cost

Explicit costs are direct, out-of-pocket expenses that a business incurs when making a decision, such as wages, rent, and materials.

What is implicit cost

the quantity of giving up over one thing to another, ex: the income earned from the next best alternative that is not chosen, such as the salary foregone when pursuing education instead of working.

What does the opportunity cost consist of?

total explicit cost + total implicit cost

Accounting Profit

The difference between total revenue and explicit costs, representing the actual profit a business makes after covering its direct expenses. TR-EC

Economic Profit

The difference between total revenue and total costs (explicit and implicit costs also opportunity cost) indicates the overall profitability of a business beyond just accounting profit. TR-EC-IC

What is normal profit

the minimum level of profit needed for a company to remain competitive in the market, considered as part of implicit costs. when economic profit = 0

When Economic profit > 0

you are doing better then an alternative venture

Economic profit = 0

you are doing as well as the next best alternative and earning a normal profit.

Economic Profit < zero

Indicates that a firm is not covering its total costs, leading to losses compared to the next best alternative. switch to a better alternative

Accounting vs Economic Profit what does it show

The difference between actual profit accounting measures and the opportunity costs of resources used in production. Economic profit is less than accounting profit because if accounts for opportunity costs

Capital

total value of assets owned by an individual or firm - physical assets plus financial assets

implicit cost of capital

If you have money in a bank that earns interest and you use that money to start a business instead, the interest you could have earned is the implicit cost of capital

Marginal Analysis

a way to decide if you should do a little more or a little less of something. You look at the extra benefit you get from doing that extra bit and compare it to the extra cost. If the extra benefit is more than the extra cost, it makes sense to do it. If not, you should stick to what you’re already doing.

Marginal cost

producing a good or service is the additional cost incurred by producing one more unit of that good or service

Increasing Marginal Cost

as you create more of something, it costs more and more to make each extra one. It's like when making cookies, if you run out of ingredients, you have to buy more, and that costs more money.

Constant Marginal Cost

Constant marginal cost means that no matter how many of something you make, it costs you the same amount to make each extra one.

Decreasing Marginal Cost

as you make more of something, it costs less and less to make each extra one. Like if you buy a big pack of stickers, the more you buy, the cheaper each sticker becomes.

Total Cost versus Marginal Cost

Total Cost represents the complete expense related to production, while Marginal Cost indicates the cost of producing one additional unit. Understanding both concepts helps in decision-making and pricing strategies.

profit-maximizing output level

Quantity at which the marginal benefit and marginal cost curves intersect leads to the maximum total profit

Sunk cost

A sunk cost is money you have already spent and cannot get back, no matter what happens. Imagine if you buy a ticket to a movie but feel sick on the day of the show; the money for the ticket is a sunk cost because you can't get it back.

What is neoclassical economics?

a framework for understanding how individuals and firms make decisions based on supply and demand, with a focus on the allocation of resources and maximizing utility or profit.

Key assumption of neoclassical economics?

individuals act rationally to maximize their utility, while firms aim to maximize profits.

Behavioral economics

the study of understanding why people sometimes make strange choices with their money and decisions, even when they know something better

What are the 8 common mistakes in decision making?

Overconfidence, Anchoring, Loss aversion, Status quo bias, Sunk cost fallacy, Confirmation bias, Availability heuristic, Hindsight bias

Overconfidence

Believing too strongly in your own abilities

Anchoring

Relying too much on the first piece of information you receive

Loss aversion

An oversensitivity to loss that leads to an unwillingness to recognize a loss and move on

Status quo bias

the tendency to avoid making a decision altogether

Sunk cost fallacy

Continuing a project because of already spent resources instead of future value

Confirmation bias

Only looking for information that supports your beliefs

Availability heuristic

Relying on immediate examples that come to mind when making decisions

Hindsight bias

Believing you knew the outcome all along after it has happened.

Marginal Benefit

change in total benefit / change in quantity

Four reasons people might rationally choose a worse payoff

concerns about fairness, non monetary rewards, bounded rationality, risk aversion

Misperceptions of Opportunity Cost

people ignore opportunity costs that are non-monetary

Overconfidence

People often beleive that they are in better financial health then they actually are

Unrealistic Expectations

most of us are overly optimistic about our future and our level of discipline

Counting dollars unequally

Mental accounting: the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others.

Framing Bias

Tendency to make a decision based on how the choices are presente

Fear of missing out (FOMO)

the anxiety of missing something enjoyable or important that others are experiencing

Excludable

people who don’t pay can be easily prevented from using a good (eg. Jeans)

Rival in Consumption

the same unit of the good cannot be consumed by more than one person at a time (eg. cheeseburger)

Non-Excludable

people who don’t pay cannot be easily prevented from using a good (eg. national defense).

Nonrival

more than one person can consume the good at same time (eg. digital music).

Private goods

excludable and rival in consumption, like wheat

free markets cannot supply goods and services efficiently unless they are private goods - excludable and rival in consumption.

Public goods

non-excludable and nonrival in consumption, like a public sewer system.

• Good that is both nonexcludable and nonrival in consumption

  • Disease prevention, defense, research

  • Society must find non-market methods for providing these goods. 

Common Resources goods

 Goods that are nonexcludable but rival in consumption, like water in a river.

Artificial scarce goods

excludable but non-rival in consumption like on-demand movies on Amazon.

Non-excludable goods

a free-rider problem where many individuals are unwilling to pay for the consumption of nonexcludable goods and instead will take a “free ride” on anyone who does pay.