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Questions and Answers
The opportunity cost of a decision is the value of the next best alternative that is given up.
True
The cost-benefit principle suggests that people should only make decisions if the benefits are less than the costs.
False
Marginal analysis is a method of decision-making that involves comparing the additional costs and benefits of a change.
True
Framing effects are a type of decision-making pitfall that involves making decisions based on how the options are presented.
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Economic models can accurately predict real-world outcomes with complete certainty.
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Sunk costs should be considered when making decisions about current and future actions.
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Microeconomics studies the performance of national economies and the policies that governments use to try to improve that performance.
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The opportunity cost of an activity is the combined value of all possible alternative activities.
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An equation is a graph that describes the relationship between two or more variables.
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The cost-benefit principle is a model that suggests that if the costs of an action increase, the action is more likely to occur.
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In an equation, the independent variable is the variable whose value is determined by the value taken by another variable.
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Economic models are complex representations of real-world situations.
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Macroeconomics considers topics such as costs of production and demand for a product.
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Implicit costs are not considered when calculating opportunity cost.
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A variable is a quantity that is fixed and cannot change.
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Measuring costs and benefits as proportions instead of absolute amounts is a recommended approach in economic analysis.
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Microeconomics studies the behavior of sugar markets.
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Macroeconomics considers monetary policy and tax policy.
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Thinking at the margin means considering the overall cost of an action.
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An equation is used to describe the relationship between a single variable.
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Economic analysis is concerned with predicting unlikely behavior.
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Walking to town to save €10 on a €2,500 item is a good example of marginal analysis.
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Study Notes
Opportunity Cost
- Opportunity cost is the value of what must be foregone to undertake an activity
- It considers explicit and implicit costs
- Examples of opportunity cost include giving up an hour of dog walking to go to the movies or giving up watching a favorite Netflix show to walk to town
- Opportunity cost only considers the best alternative, not the combined value of all possible activities
Economic Models
- Economic models involve simplifying assumptions
- They consider which aspects of the decision are essential and which are irrelevant
- An abstract representation of key relationships is used
- The Cost-Benefit Principle is a model that states if costs of an action increase, the action is less likely, and if benefits of an action increase, the action is more likely
Decision Pitfalls
- Economic analysis predicts likely behavior
- There are three general cases of mistakes:
- Measuring costs and benefits as proportions instead of absolute amounts
- Ignoring implicit costs
- Failure to think at the margin
Pitfall #1: Measuring Costs and Benefits
- Measuring costs and benefits as proportions instead of absolute amounts can lead to mistakes
- Example: walking to town to save €10 on a €25 item vs. walking to town to save €10 on a €2,500 item
Microeconomics and Macroeconomics
- Microeconomics studies the choice and its implications for price and quantity in individual markets
- Macroeconomics studies the performance of national economies and the policies that governments use to try to improve that performance
- Microeconomics considers topics such as costs of production, demand for a product, and exchange rates
- Macroeconomics considers topics such as monetary policy, deficits, and tax policy
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Description
Learn about opportunity cost, the value of what must be foregone to undertake an activity, considering explicit and implicit costs, and understand the importance of considering only the best alternative.
