Week 1 - Opportunity Cost Flashcards
(24 cards)
What is economics?
The study of how choices are made under conditions of scarcity.
What do people have in unlimited supply according to economics?
Unlimited wants.
What is limited in economics?
Resources.
What is the goal of economists regarding resources?
To understand the optimal way to allocate limited resources (constrained optimisation).
What does scarcity lead to?
Trade-offs.
What is the Scarcity Principle?
Having more of one thing means having less of something else.
What is the consequence of the Scarcity Principle for economic decisions?
All economic decisions have costs.
What is the Cost-Benefit Principle?
A rational decision-maker should take an action if and only if the benefits outweigh the costs.
What is economic surplus?
The difference between the benefits and the costs of an action.
Can costs be implicit?
Yes, costs can be implicit (not directly paid but still real, like opportunity costs).
What costs should be included in a cost-benefit analysis?
All relevant costs, including both explicit and implicit costs.
What is a common decision-making pitfall regarding costs and benefits?
Measuring costs and benefits as proportions rather than absolute money amounts.
What is opportunity cost?
The value of the next best alternative that is foregone by taking a particular action.
What is a decision pitfall related to opportunity cost?
Ignoring opportunity costs.
What is a sunk cost?
A cost that is not recoverable at the moment a decision is made.
Which costs should influence a decision?
Only the costs that can be avoided by not taking the action.
What is the sunk cost fallacy?
The mistake of considering sunk costs when making a decision.
What is another decision pitfall to avoid besides ignoring opportunity costs?
Failing to think at the margin.
What does “thinking at the margin” mean?
Focusing on the cost and benefit of an additional unit of an activity when deciding how much of it to undertake.
What is microeconomics?
The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.
What is macroeconomics?
The study of the performance of national economies and the policies governments use to try to improve that performance.
What is positive economics?
The branch of economics that is independent of the ethical value system of the economist.
What is the incentive principle?
The idea that people usually respond to incentives, and this is a foundation of positive economics.
What is normative economics?
The branch of economics involving statements that reflect or are based on the economist’s ethical value system, either explicitly, implicitly, or by omission.
