Thinking like an Economist I Flashcards
What is Microeconomics?
How individuals make choices when resources are scarce. Allocation of resources and individual trade interaction.
What is Macroeconomics?
Large scale. Study of the performance of whole nations and economies, government choices.
What is the Scarcity Principle?
Resources are limited, getting one thing means less of another.
Wants exceed available resources.
When is something scarce?
When you have to sacrifice money, time or effort for it. Or pay a price e.g. not free.
How does the scarcity principle impact consumers, producers and governments?
Main concept is tradeoffs.
Consumers forced to decide what to consume.
Producers forced to decide what to produce.
Governments forced to decide how to allocate resources to achieve specific objectives.
What are the four core concepts of the scarcity principal?
Wants exceed available resources -> Scarce resources -> Rational choices have to be made -> Rational choices have to be made -> Marginal analysis to make decisions
What is opportunity cost?
Next best option which was sacrificed.
What is the cost-benefit principle?
Choosing to do something only if the extra benefit (incremental) is greater than or equal to the extra cost (incremental) assuming a rational individual.
When would you undertake a task according to the cost benefit principle?
When extra benefit is equal to or greater than cost.
What is economic surplus?
ES = Incremental benefit of action - (incremental explicit and implicit cost - non monetary directly of action)
How do economic choices maximise the economic surplus?
Maximising the benefits
Minimising the costs
Making sure that the opportunity cost is minimised is the most efficient choice of resources.
What are the rules for making rational economic choices?
Including opportunity cost
Exclude sunk cost
Measure in absolute dollar amount not %
Based on Marginal Analysis
What is a Sunk cost?
Expenses that have occurred in the past before a decision has been made.
Costs that are typically not able to be directly recovered.
Define marginal benefit
The change in total benefit from doing one extra unit of an activity.
Change in total benefit / one extra unit sold
21.50 - 20 / 11-10 donuts
= 1.50$ for 11th donut
When do you undertake a task using Marginal analysis according to the cost-benefit principle?
Do task when extra benefit > extra cost
MB > MC
