The Scarcity Principle (no-free-lunch principle)
Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another. (That having more of any good thing necessarily requires having less of something else.)
The Cost-Benefit Principles
An individual (or firm or society) should take an action if, and only if, the extra its benefits from taking the action are at least as great as the costs.
The Incentive Principle
A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.
The pitfall of measuring costs and benefits as proportions rather than as absolute dollar amounts. Means?
Many decision makers treat a change in cost or benefit as insignificant if it constitues only a small proportion of the original amount.(Saving are savings even with large costs.)
The pitfall of ignoring implicit costs. Means?
When performing a cost-benefit analysis of an action, you must account for all relevant costs including the implicit value of alternatives that must be forgone in order to carry out the action. Ex: A resource ( like a frequent-flyer coupon) may have a hig
The pitfall of failing to weigh costs and benefits at the margin. Means?
Ignore sunk costs. Don't confused average costs and benefits with marginal costs and benefits. Common mistake is to conclude that an activity should be increased if its average benefit exceeds its average cost. The Cost-Benefit Principles tells us that th
Definition of Economics (book/simple and okediji def)
The study of how people make choices under conditions of scarcity and the results of those choices for society. (Okediji Def: the study of how individuals coordinate their wants and desires, given the decision-making mechanisms, social customs, and politi
What's the key word in Okediji's Definition?
What are the three key features of this word that we need to examine.
Coordination
1. What and how much to produce (what/how many goods will be produced)
2. How to produce (how are the goods produced)
3. For whom to produce (who will benefit)
Rational Person
Someone with well-defined goals who tried to fulfill those goals as best he or she can
Opportunity Cost
The opportunity cost of an activity is the value of what must be forgone in order to undertake the activity (oftentimes refers solely to implicit cost)
Okediji: The value of the next best alternative that you must give up in order to enjoy a present consu
Opportunity Cost - Implicit vs Explicit
Explicit: opportunity cost with transaction of money. Implicit = opportunity cost with no transaction of money
Sunk Costs
Costs that are beyond recovery at the moment a decision must be made. (ex: money spent on a nontransferrable, nonrefundable airline ticket)
Okediji : A cost that has been incurred and cannot be recovered for the relevant decision making process
Marginal Cost
The increase in total cost that results from carrying out one additional unit of an activity (okediji: the incremental cost incurred in producing the next or last unit of output.)
Marginal Benefit
The increase in total benefit that results from carrying out on addition unit of an activity (Okediji: the additional gain realized from the consumption of an extra unit of output)
Average Cost
The total cost of undertaking n units of an activity divided by n
Average Benefit
The total benefit of undertaking n units of an activity divided by n
Normative Economic Principle
An economic principle that provides guidance about how people should behave (example: Cost-Benefit Principle = ignore sunk costs)
Positive Economic Principle
An economic principle that predicts how people will behave.
Microeconomics
The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets
Macroeconomics
The study of the performance of national economies and the policies that governments use to try to improve that performance
Economic Naturalist
Someone who uses insights from economics to help make sense of observations from everyday life.
Comparative advantage
Everyone does best when each person/entity concentrate(s on the activities for which his or her opportunity cost is lowest (one has a comparative advantage if his or her opportunity cost of performing a task is lower than the other person's opportunity co
Absolute Advantage
One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person.
Production Possibilities Curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good (straight line means slop is constant)
Attainable Point
Any combination of goods that can be produced using currently available resources
Unattainable Point
Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other
Efficient Point
Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other.
Outsourcing
A term increasingly used to connote having services performed by low-wage workers overseas
The Principle of Increasing Opportunity Cost (also called "The Low-Hanging-Fruit Principle")
In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.
Why is the production possibilities curve bow-shaped?
The greater the differences among individual opportunity costs, the more bow-shaped the production possibilities curve will be and the more bow-shaped the production possibilities curve, the greater will be the potential gains from specialization.
3 Main Causes of Economic Growth
1. Investment in new factories and equipment
2. Population growth
3. Improvements in knowledge and technology