Econ 202- Principles of Economics

terms and definitions

economics

how scarce resources are allocated

Cost-Benefit Principle

Since people respond better to incentives, decisions are mostly shaped by expected costs and benefits

• before making a choice one has to identify all cost and benefits and then choose the option where benefits outweigh the cost

• doesn’t necessarily have to be monetary

Willingness to Pay (WTP)

the maximum amount a person is willing to give up to OBTAIN a benefit or AVOID a cost

• parking ticket example; parking ticket is 20$

  • you are willing to pay 5 dollars to avoid the risk= WTP= 5$

  • parking legally is less than that= pay the meter- the price is already lower than you’re willingness to pay so there’s no need to take the risk

  • if parking costs more than your willing ness to pay, you take the risk

NOTE: willingness to pay DOES NOT EQUAL wanting to pay

Economic Surplus

the total benefits minus the total costs from a decision. measures how much a decision improves your well being

• everyone (buyers and sellers) benefit from voluntary exchange

• economics includes all costs benefits- not just monetary but also emotional, social, moral etc.

Framing Effects

occurs when a decision is influenced by how choices are described rather than by their underlying outcomes.

Opportunity Cost Principle

true cost of a decision is benefit/value of the next best alternative that must be given up (trade offs)

• costs of going to college= no earnings from a job, have to pay tuition

• costs of going to work (job)= forgoing future opportunities and future earnings

  • NOTE: there is no opportunity cost for things that happen no matter what choice you make

what counts as an opportunity cost?

out of pocket costs, implicit costs (non out of pocket)

NOTE: not all non out of pocket costs are opportunity costs (it isn’t an opportunity cost if it doesnt change the outcome), not all time costs are opportunity costs

Sunk Cost

a cost that has already happened (incurred) and cannot be recovered

Production Possibilities Frontier (PPF)

a graph that shows combinations of output that are attainable given scarce (limited) resources

Scarcity

resources are limited, using resources for one activity leaves fewer for others

Marginal Principle

decisions about quantities that are best made incrementally

Marginal benefit

the extra benefit from one more “something”

marginal cost

the extra cost from one more “something”

Rational Rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs or marginal surplus decreases

Interdependence Principle

your best choice depends on uour other choices, the choices others make, developments in other markets, and expectations about the future