Thinking like an Economist - Key Terms (ECO101 Microeconomics)

Vocabulary flashcards covering decision making, costs, opportunity costs, WTP, and marginal analysis from the lecture notes.

Opportunity Cost

The value of the next-best alternative forgone when making a decision; included in costs as the foregone benefits of the best alternative.

Explicit Costs

Costs you actually pay with money (e.g., wages, rent, materials).

Implicit Costs

Non-monetary opportunity costs such as time or foregone alternative uses that do not appear on receipts.

Economic Costs

Opportunity costs = explicit costs + implicit costs; the true cost of a decision from an economic perspective.

Accounting Costs

Explicit costs only; costs recorded in financial accounts.

Economic Profit

Revenue minus economic costs (explicit + implicit); can be negative even if accounting profit is positive.

Accounting Profit

Revenue minus accounting costs (explicit costs only).

Sunk Cost

A cost that has already been incurred and cannot be recovered; should not affect current decisions.

Zero Economic Profit

When Revenue equals Opportunity Costs; you’re earning as much as your next best alternative.

Willingness to Pay (WTP)

The maximum price a buyer is willing to pay; WTP = Benefits − Implicit Costs; buy if WTP ≥ price.

Price

The explicit monetary cost paid for a good or service.

Marginal Cost (MC)

The additional cost of producing one more unit; the increase in total cost from the next unit.

Marginal Benefit (MB)

The additional benefit from consuming one more unit.

Marginal Analysis

Comparing MB and MC for the next unit to decide how many units to buy or produce.

Thinking at the Margin

A decision-making approach that evaluates the cost and benefit of a tiny extra unit.

Total Cost

The sum of costs for a given quantity of output.

Total Benefit

The sum of benefits for a given quantity of output.

Positive Analysis

Descriptive statements that can be tested as true or false.

Normative Analysis

Statements that involve value judgments about what should be.

Model

A simplified representation of reality built with assumptions to predict outcomes.

Assumptions (in models)

Simplifications used to focus on important aspects and make predictions.

Principle 1: All Costs are Opportunity Costs

Every choice has an opportunity cost; consider the next best alternative.

Principle 2: Quantity First

Decide how many units to take before deciding action; use marginal analysis to determine quantity.

Principle 3: Given Quantity, Decide Action

After choosing a quantity, decide to buy/sell this quantity by comparing total benefits and costs.

Next Best Use

The best alternative use of resources other than the chosen option; essential for calculating OC.

Value of Next Best Alternative

The benefit foregone from the next best option when a choice is made.

WTP and Price Relationship

Buy if WTP ≥ Price; WTP = Benefits − Implicit Costs; contrasts with explicit price.

Impact of Marginal Decisions

Decisions are driven by the comparison of MB and MC for the next unit; stop where MB < MC.