Microeconomics Chapter One

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  1. Economics
    The study of how people make choices under conditions of scarcity and of the results of those choices for society
  2. The Scarcity 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
  3. 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.
  4. Economic Surplus
    The benefit of taking an action minus the cost
  5. Opportunity Cost
    the value of what must be forgone to undertake an activity
  6. Sunk Cost
    a cost that is beyond recovery at the moment a decision must be made
  7. Marginal Cost
    The increase in total cost that results from carrying out one additional unit of an activity
  8. Marginal Benefit
    the increase in total benefit that results from carrying out one additional unit of an activity
  9. Average Cost
    the total cost of undertaking n units of an activity divided by n
  10. Average Benefit
    the total benefit of undertaking n units of an activity divided by n
  11. Normative Economic Principle
    one that says how people should behave
  12. Positive Economic Principle
    one that predicts how people will behave
  13. Microeconomics
    the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets
  14. Macroeconomics
    the study of the performance of the national economies and the policies that governments use to try to improve that performance
  15. 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.
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Microeconomics Chapter One

University of Michigan
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