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Core Principles of Economics Summary

A Principled Approach to Economics

  • Economics is a study of choices and a way of thinking, influencing personal and business decisions.

Cost-Benefit Principle

  • Evaluate full costs and benefits before making decisions.

  • Only pursue an option if benefits are greater than or equal to costs.

  • Willingness to pay helps quantify benefits and costs.

  • Economic surplus: total benefits minus total costs, indicating improved well-being.

Opportunity Cost Principle

  • Opportunity cost: the next best alternative foregone when making a decision.

  • Focus on trade-offs associated with choices; every choice has an associated cost.

  • Scarcity necessitates trade-offs; limited resources lead to limiting alternatives.

Marginal Principle

  • Decisions about quantities should be made incrementally, focusing on marginal benefits and costs.

  • Marginal benefit: additional benefit from one more unit; marginal cost: additional cost from one more unit.

  • Continue making incremental choices until marginal benefit equals marginal cost.

Interdependence Principle

  • Decisions are interconnected; consider other choices, others’ decisions, market interactions, and future expectations.

  • Understanding the network of choices can shape individual decision-making outcomes.