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Profit
Revenue (from sales) minus the opportunity cost of producing the goods or service
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Marginal Decision Rule
If the marginal (extra) benefit exceeds the marginal cost of a choice then do it.
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Incentive
A change that causes one to act,i.e. prospect of a reward or punishment
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You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is. What is the $1000 already spent considered?
Sunk Cost (irrelevant to current dectision)
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Market
A group of buyers and sellers
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“Organize Economic Activity” means determining?
What goods to produce, How to produce them, How much to produce, Who gets them
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Market Economy:
Allocates resources through the decentralized decisions of many households and firms as they interact in markets
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“Led by an invisible hand” insight by
Adam Smith in The Wealth of Nations (1776)
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Invisible Hand theory: What determines prices?
The interaction of buyers and sellers
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Invisible Hand theory: What does each price reflect?
Each price reflects the good’s value to buyers and the cost of producing the good
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Invisible Hand theory: Prices guide self-interested households and firms to make decisions that, in many cases:
Maximize society’s economic well-being.
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Efficiency:
society gettting most from its scarceresources
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Equality:
prosperity is distributed uniformly amongsociety’s members
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Tradeoff:
To get greater equality, couldredistribute income from wealthy to poor.But this reduces incentive to work and produce,shrinks size of economic “pie.”
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What is the relationship between tradeoffs and incentive
tradeoffs diminish incentive
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Making decisions requires
comparing the costsand benefits of alternative choices.
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The opportunity cost of any item is
relevant cost for decision making (what must be given up to obtain it)
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marginal changes –
- incremental adjustmentsto an existing plan.
- (price to charge or how many employees)
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Rational people ____and ___do their best toachieve their objectives.
.systematically, purposefully
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Rational people make decisions by evaluating:
costs and benefits of marginal changes – incremental adjustmentsto an existing plan.
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Profit equals?
Revenue (sales) minus the opportunity cost of producing the good
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Marginal Decision Rule:
If the the Marginal (extra) benefit exceeds the opportunity cost then do it
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