+380.000 other summaries
A unique study tool
A rehearsal system for this summary
Studycoaching with videos
Remember faster, study better. Scientifically proven.
Summary - Principles of economics
1 Thinking Like an Economist
The economist's first approach is based on confronting a hypothesis with evidence before conditionally excepting it, which is why it is considerd a science.
Second the economist will always look at motivation. He argues that people tend to behave in a self-interested fashion and respond to incentives.
1.1 Studying Choice in a World of Scarcity
Scarcity is a fundamental fact of life. There is never enough time, money or energy to do everything we want to do or have everything we would like to have.
Scarcity means we must choose, and sometimes make hard choices.
The study of how people make choices under conditions of scarcity and of the results of those choices for society
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; hence the cliché "There's ain't no such thing as a free lunch".
An individual should tak an action if, and only if, the extra benefits are at least as great as the extra costs.
1.2 Applying the cost-benefit principle
Someone with well-defined goals, who fulfills those goals as best she can.
The economic surplus from taking any action is the benefit of taking that action minus its cost.
The opportunity cost of an activity is the value of the next best alternative that must be forgone in order to undertake the activity
1.3 The role of economic models
Weighing of costs and benefits
Scarcity is a basic fact of economic life. Having more of on good thing almost always means having less of another. The cost-benefit principle holds that an individual should take action if, and only if, the extra benefit from taking the action is at least as great as the extra cost. The benefit of taking any action minus the cost of taking the action is called economic surplus from that action. Hence the cost-benefit principle suggests that we take only those actions that create additional economic surplus
1.4 Four important decision pitfalls
- Measuring costs and benefits as proportions rather than absolute money amounts
- Ignoring opportunity costs
- Failure to ignore sunk costs
- Failure to understand the average-marginal distinction
A cost that is beyond recovery at the moment a decision must be made.
Sunk costs must be borne whether or not an action is taken, theey are irrelevant to the decision of whether to take the action.
The increase in total cost that results from carrying out one additional unit of an activity
The increase in total benefit that results from carrying out one additional unit of an activity.
The total cost of undertaking n units of an activity devided by n
The total benefit of undertaking n units of an activity divided by n
Four important dicision pitfalls
- The pitfall of measuring costs or benefits proportionally: many decision makers treat a change in cost or benefit as insignificant if it constitutes only a small proportion of the original amount. Absolute money amount, not proportions, should be employed to measure costs and benefits.
- The pitfall of ignoring opportunity costs: when performing a cost-benefit analysis of an action, it is important to account for all relevant opportunity costs, defined as the values of the most highly valued alternatives that must be forgone in order to carry out the action. A resource may have a high opportunity cost, even if you originally got it 'for free', if its best alternative use has high value. The identical resource may have a low opportunity cost, however, if it has no good alternative uses.
- The pitfall of not ignoring sunk costs: when deciding whether to perform an action, it is important to ignore sunk costs - those costs that cannot be avoided even if the action is not taken.
- The pitfall of using average instead of marginal costs and benefits: decision makers often have ready information about the total cost and benefits of an activity, and from this it is simple to compute the activity should be increased if its average benefits exceeds it average cost. The cost-benefit principle tells us that the level of an activity should be increased if, and only if, it's marginals benefit exceeds its marginal cost.
Latest added flashcards
The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit
The difference between a firm's total revenue and the sum of its explicit and implicit costs
The opportunity costs of the resources supplied by the firm's owners
The difference between a firm's total revenue and its explicit costs
The actual payments a firm makes to its factors of production and other suppliers
The reduction in total economic surplus that results from the adoption of a policy
- Buyers and sellers are well informed
- Markets are perfectly competitive
- The demand and supply curves satisfy certain other restrictions
- Transaction costs are lower