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FNCE 5151 E 1 theory

Exam 1 theory

TermDefinition
The Scarcity Principle (also called the 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
The Cost-Benefit Principle An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
The Incentive Principle A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.
THE THREE IMPORTANT DECISION PITFALLS 1: The pitfall of measuring costs or benefits proportionally 2: The pitfall of ignoring implicit costs 3: The pitfall of failing to think at the margin
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 dollar amounts, not proportions, should be employed to measure costs and benefits.
The pitfall of ignoring implicit costs When performing a cost-benefit analysis of an action, it is important to account for all relevant costs, including the implicit costs and value of alternatives that must be forgone in order to carry out the action.
The pitfall of failing to think at the margin The only costs that should influence a decision about whether to take an action are those we can avoid by not taking the action. Similarly, the only benefits we should consider are those that would not occur unless the action were taken.
The Principle of Comparative Advantage Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest.
The Principle of Increasing Opportunity Cost (also called the “Low-Hanging-Fruit Principle”) In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.
The Efficiency Principle Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
The Equilibrium Principle (also called the No-Cash-on-the-Table Principle): A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action.
Rules about how price changes affect total expenditure for an elastically demanded good R1: When price elasticity of demand is greater than 1, changes in price and changes in total expenditure always move in opposite directions. R2: When price elasticity of demand is less than 1, changes in price and changes in total expenditure same direc
Created by: westwood15
 

 



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