Untitled Quiz

Scarcity Principle

• Having more of one good thing usually means having less of another.

Cost-Benefit Principle

• No action takes place unless its marginal benefit is at least as great as its marginal cost.

Incentive Principle

• Incentives are central to people's choices.

Principle of Unequal Costs

• Marginal cost: The additional cost incurred by producing one more unit of a good.
• Opportunity cost: The value of the next-best alternative forgone when making a choice.
• Sunk cost: A cost that has already been incurred and cannot be recovered.
• Average cost: The total cost of production divided by the number of units produced.

Principle of Comparative Advantages

• Everyone does best when each concentrates on the activity for which they are relatively the most productive.

Equilibrium Principle

• A market in equilibrium leaves no unexploited opportunities for individuals, but may not exploit all gains achievable through collective actions.

Efficiency Principle

• Efficiency makes the economic pie grow larger.

Ceteris Paribus

• A Latin phrase meaning "all other things being equal". Used to isolate the effect of a single variable on an outcome.

Rationality

• Acting in a way to maximize one's self-interest.

Decision Pitfalls

• Measuring costs and benefits as proportions rather than absolute amounts: The benefits and costs of smaller amounts can be misleading.
• Ignoring opportunity (implicit) costs: These costs are the value of the next-best alternative foregone.
• Taking sunk costs into account: Sunk costs should be ignored when making decisions about the future.
• Failure to think at the margin: Decision-makers should focus on the benefits and costs of an additional unit of activity.

Economic Surplus

• The economic surplus of an action is equal to its benefit minus its costs.
• Economic Surplus = Total Benefits - Total Costs.

Example of Measuring Costs and Benefits as Proportions:

• Should you walk 3km to save €10 on a €1,000 laptop?

Example of Ignoring Opportunity Costs:

• Should you go to London?
• Frequent-flyer ticket otherwise costs €500.
• Other relevant costs (hotel, food): €1,000.
• Reservation price: €1,350.

Example of Failure to Ignore Sunk Costs:

• How much should you eat at an all-you-can-eat restaurant?
• Cost: €5 at the door.
• 20 randomly selected guests eat for free.

Example of Failure to Understand Average-Marginal Distinction:

• Should you allocate your resources differently to get more coconuts?
• The focus should always be on the benefit and cost of an additional unit of activity (marginal).