Chapter 1: Thinking as an economist
* Define and explain a range of core economic terms and concepts, including economic surplus, opportunity cost and sunk cost
Economic decision – any decision whereby securing something o value means going without some other thing of value
Economics – the study of how people make choices under conditions of scarcity and of the results of those choices for society
Economic surplus – the gain that results from undertaking an action when the benefits out weight the cost.
Opportunity cost – the value of the next-best alternative to undertaking a particular action
Sunk cost – a cost that cannot be recovered at the moment a decision is made.
* Distinguish between microeconomics and macroeconomics and between positive and normative economics
Microeconomics – the study of individual choice
Macroeconomics – the study of the performance of national economies and government policy
Positive economics – economic analysis that explains what happens and why, but does not state what should happen
Normative economics – economic analysis that states what should or ought to happen.
* State the scarcity principle and explain its implications for decision making
Scarcity principle – having more of one thing means we have less of another. People take into account the trade off they are making to gain something.
* State the cost-benefit principle and apply it to simple economic decisions
Cost-benefit principle – an individual should undertake a particular action if the extra benefits of undertaking that action are at least as great as the extra costs.
* State the incentive principle and explain its implications for decision making and policy
Incentive principal – a person is more likely undertake an action if its benefit rises, and less likely to undertake it if its cost rise.
* List and explain the common pitfalls that people encounter when applying the cost-benefit principle, and recognise these pitfalls in a range of real-world examples
Pitfall 1: failing to account for all opportunity costs - when performing a cost-benefit analysis of a firm, it is important to account for all relevant opportunity costs.
Pitfall 2: failing to ignore sunk costs - when deciding whether to undertake a particular action, it is important to ignore sunk costs – costs which cannot be avoided.
Pitfall 3: failing to account for all relevant benefits - it is important to account for all relevant benefits, defined as the most you would be willing to pay not to go without those things.
Pitfall 4: failing to measure costs and benefits as absolute dollar amounts rather than as proportions - many decision makers treat a change in cost or benefit as insignificant if it constitutes only a small proportion of the original amount. Absolute dollar amounts should be employed to measure costs and benefits.
Pitfall 5: failing to know when to use average costs and benefits and when to use marginal costs and benefits - The level of an activity should be increased if its marginal benefit exceeds its marginal cost
Pitfall 6: failing to incorporate time into cost-benefit thinking - cost-benefit analysis should require adjusting costs and benefits that occur at different points in time to reflect their value at a common point in time so they can be compared.
Chapter 2 Comparative advantage: the basis for trade
* Define and determine absolute advantage and comparative advantage
Absolute advantage: When one person is able to produce a good or service or perform a given task, with less resources than another person Comparative advantage; When one person’s opportunity cost of producing a good or service, or of performing a given task, is lower than another person’s opportunity cost.
* State and apply the principle of comparative advantage
Opportunity cost – when one person’s opportunity cost of producing a good or...