EVWL - The core principles of economics

21 flashcards · Economics · by ehartl

1. What is the Cost-Benefit-Principle?

   Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits associated with that choice pursue that choice, only if the benefits are at least as larges as the costs

2. Quantifying Costs and Benefits: How to compare costs and benefits?

   Convert costs and benefits into Money by evaluating your willingness to pay. Money is the measuring stick, not the objective!

3. How to maximize your Economic Surplus?

   Follow the cost-benefit-principle, and your choices will increase your economic surplus. Both buyers and sellers benefit from voluntary exchange.

4. What are framing effects?

   Depending on the description of costs and benefits, their meaning seems to be different. But it isn't! Framing effects can lead you astray

5. How to apply the cost-benefit principle?

   Calculate costs and benefits, relative to your next best alternative. --> Opportunity cost principle

6. What is the Opportunity Cost Principle?

   The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

7. Why do opportunity costs reflect scarcity?

   Opportunity cost of something is the next best alternative your have to give up the opportunity cost principle highlights the problem of scarcity scarce resources: limited income, time, willpower, ... whenever you choose to do something, you choose not to do something else

8. What are the four lessons of opportunity costs?

   Some out-of-pocket costs are opportunity costs Opportunity costs need not involve out-of-pocket-financial costs not all out-of-pocket costs are real opportunity costs Some nonfinancial costs are not opportunity costs

9. How can you find opportunity costs?

   With the Or-What-Trick eg. Should you hang out with your friends? Or what? Or should you learn for your exam?

10. What about sunk costs?

    They should be ignored in consideration, as they are lost regardless of the choice.

11. What is the production possibility frontier?

    visualizes the opportunity costs maps out the different sets of output that are attainable with your scarce resources illustrates your alternative outputs moving along your production possibility reveals your opportunity costs productivity gains shift your production possibility frontier outward

12. What is the Marginal Principle?

    Decisions about quantities are best made incrementally. You should break "how many" decisions down into a series of smaller, or marginal, decisions

13. When is the Marginal Principle useful?

    Whenever you have to make "how many" decisions! examples: How many workers should I hire? --> Should I hire one more worker? How many classes should I take? --> Should I take one more class this semester?

14. What is the marginal benefit?

    the extra benefit from one extra unit (of goods purchased, hours studied, etc.)

15. What is the marginal cost?

    the extra cost from one extra unit

16. How to use the Rational Rule to maximize your economic surplus?

    If something is worth doing, keep doing it until your marginal benefits equal your marginal costs. following the marginal rule leads to good decisions

17. How do businesses apply the marginal rule?

    Businesses experiment at the margin to learn their marginal costs and benefits for example if not sure if to hire 2 or 3 workers --> hire 2 permanently. Then hire a third and check if benefits are at least equal to costs

18. What is the Interdependence Principle?

    Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change

19. Which four types of interdependencies should you think about?

    dependencies between each of your individual choices dependencies between people or businesses in the same market dependencies between markets dependencies through time

20. How could you predict what others do?

    Put yourself in their shoes by mentally "trading places" with someone so that you understand their objectives and constraints, you can forecast the decisions they will make

21. How to use the four core principles in practice?

    MCOI: use the marginal principle by breaking "how many" choices into marginal choices. "A bit more of something or a bit less?" apply the cost-benefit principle by assessing the relevant costs and benefits. your need to assess wether the marginal benefit exceeds the marginal cost Evaluate all the relevant costs by applying the opportunity cost principle. Ask "or what?" Apply the interdependence principle to identify how changes in other factors might lead you to make a different decitions